First In, First Out (FIFO) is an asset-management and valuation method in which assets produced or acquired first are sold, used, or disposed of first. The rationale behind this approach is that the earliest items were the most costly to produce and so they should be sold first to recoup some of that cost. FIFO is commonly used for inventory management but can also be applied to other types of assets.Critics of FIFO argue that it does not always reflect actual market conditions and can result in inaccurate valuations.For example, if a company has two products with different shelf lives, the product with the shorter shelf life may be valued more highly using FIFO even though it may not sell as quickly. There are also situations where newer products might undercut older products on price, making them less desirable from a financial standpoint even though they were produced earlier.Despite its drawbacks, FIFO remains one of the most popular methods for managing assets because it provides a simple way to track costs and ensure that older items are eventually sold off. Companies often use software programs specifically designed for tracking inventory using FIFO methodology.
