What is FIFO Method?
The FIFO method (First-In, First-Out) is an inventory valuation technique that assumes the earliest goods purchased or produced are the first to be sold. As a result, the cost of goods sold reflects older purchase prices while ending inventory reflects the most recent (and often higher) costs. FIFO is permitted under both IFRS and US GAAP.
How It Works
- Record each purchase batch with its quantity and unit cost.
- When goods are sold, assign the oldest batch’s cost first.
- Continue through batches in order of receipt until the sold quantity is exhausted.
- Ending inventory is valued at the cost of the most recent purchases.
- During inflation, FIFO produces higher reported profit and higher ending inventory.
Saudi Context
FIFO is the most common inventory method for Saudi traders, distributors, and retailers, particularly for products with expiry dates such as food, pharmaceuticals, and cosmetics. SOCPA-aligned IFRS (IAS 2) explicitly permits FIFO but prohibits LIFO. ZATCA generally accepts FIFO inventory cost for VAT and corporate tax computations.
Example
A pharmacy buys 100 units at SAR 10 (Jan), then 100 units at SAR 12 (Feb), then 100 units at SAR 14 (Mar). It sells 150 units in March. Under FIFO, COGS = (100 * 10) + (50 * 12) = SAR 1,600. Ending inventory = (50 * 12) + (100 * 14) = SAR 2,000.