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Simple English definitions for legal terms
FIFO accounting
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A quick definition of FIFO accounting:
FIFO accounting is a way to figure out how much a company's inventory is worth. It means that the first things a company buys are the first things they sell or get rid of. This method usually makes a company's profits look higher than if they used a different method. However, it might also mean they have to pay more taxes. Using FIFO can help new businesses get loans more easily.
A more thorough explanation:
FIFO accounting is a way of calculating the value of inventory. It stands for "First in, first out." This means that the first items purchased are assumed to be the first ones sold or disposed of.
For example, let's say a store buys 10 shirts for $5 each. Later, they buy 10 more shirts for $7 each. If they sell 5 shirts, FIFO accounting assumes that they sold the first 5 shirts they bought for $5 each.
FIFO accounting usually results in a higher recorded value of inventory and higher net income than if LIFO (Last in, first out) accounting were used. However, it may also lead to higher income taxes.
New businesses may prefer to use FIFO accounting because it can help them get loans on better terms.