Under the FIFO method, which inventory costs are recognized first?

The FIFO (First-In, First-Out) method operates on the principle that the earliest items purchased (or produced) in inventory are the first to be sold. Therefore, under this method, the oldest inventory costs are recognized first when calculating the cost of goods sold.

When businesses apply FIFO, they assume that the inventory that was acquired first is sold first, which can be particularly relevant during periods of inflation. In such cases, the costs associated with the older inventory will reflect lower prices compared to more recent acquisitions, potentially resulting in lower cost of goods sold and higher net income. This method provides a more current view of the inventory's market value on the balance sheet, as it aligns the most recent costs with the remaining inventory.

It's important to note that while FIFO emphasizes the recognition of older inventory costs, it does not take into account average costs or the last purchased inventory when determining which costs to allocate to sales first. This characteristic distinguishes FIFO from other inventory valuation methods.