What is First-In, First-Out (FIFO) Method?
The first-in, first-out (FIFO) method is an inventory valuation approach that assumes the oldest inventory units are sold first, so COGS reflects older costs and ending inventory reflects the most recent purchase prices.
How It Works
- Earliest purchases are charged to COGS first, latest purchases sit in ending inventory.
- Produces higher reported profit in inflationary periods.
- Closely matches physical flow for perishables and dated goods.
- Permitted under IAS 2 and accepted by ZATCA for both income and VAT filings.
Saudi Context
FIFO is the most commonly used method by Saudi retailers, pharmacies, and food distributors where stock rotation matches physical product flow. ZATCA accepts FIFO costing on the VAT return as long as the same method is consistently applied year over year.
Example
A Saudi retailer buys 50 units at SAR 20 each, then 30 units at SAR 25 each, and sells 60 units. Under FIFO, COGS = (50 × 20) + (10 × 25) = SAR 1,250. Ending inventory = 20 units × SAR 25 = SAR 500.