QB Issue Resolution:

What is FIFO, and how is it used for inventory cost accounting?
Answer ID: 6381

FIFO stands for First In, First Out. It’s an important concept for people who track inventory in QuickBooks Online.

As prices go up and down, you might purchase items for a different price than you’d previously paid for units of the same type. When you have items in inventory that are of the same kind but were bought at different prices, it raises a question: For each item you sell, which purchase price applies to that item?

QuickBooks Online uses the FIFO method to answer this question. As the name implies, QuickBooks Online will always consider the first units purchased (First In) to be the first units sold (First Out) and will adjust your assets and Cost of Goods Sold (COGS) accordingly whenever sales of inventory items are entered.

Note: When you turn on Quantity on Hand tracking, if your initial quantity on hand is greater than zero, you should always specify a cost before saving. If you turn on Quantity on Hand tracking and enter an initial quantity on hand greater than zero, QuickBooks Online will use the dollar amount in the Cost field, at that time, to determine the purchase price of your starting inventory.

An example will make this clearer:

Let’s suppose you decide to begin selling a product called a “widget.” You purchase 20 widgets for $6 apiece. While they remain in inventory, the widgets are considered assets and are valued at cost. (Since you haven’t sold any widgets yet, your COGS for widgets is $0.)

Current Inventory: 20 units at $6 each
Total Widget Assets: $120
Total Widget COGS: $0

You schedule meetings with some of your customers. They show great interest in widgets, and you realize you don’t have enough. You order 30 more widgets, but since your last purchase the price from your wholesaler has gone up to $7 apiece. When you record the purchase, QBO adds $210 to your assets.

Current Inventory: 20 units at $6 each; 30 units at $7 each
Total Widget Assets: $330
Total Widget COGS: $0

You meet with the first customer, and she purchases 15 widgets. Because the $6 units entered your inventory before the $7 units, QBO applies the FIFO rule and values all 15 units in this order at $6 apiece. When you record the sale, the asset total for widgets is decreased by $90, and the COGS for widgets is increased by $90.

Current Inventory: 5 units at $6 each; 30 units at $7 each
Total Widget Assets: $240
Total Widget COGS: $90

You meet with another customer, and he purchases 20 widgets. When you record the sale, QuickBooks Online applies the FIFO rule and adds the $6 units first. Since only five of those units remain in inventory, the other 15 units for this order are valued at $7 apiece. Your widget assets are reduced by $135 (5×6 + 15×7), and your COGS is increased by $135.

Current Inventory: 15 units at $7 each
Total Widget Assets: $105
Total Widget COGS: $225

As you can see, if you then sell more widgets from your current inventory to a third customer, they will all be valued at $7 apiece.

Note: FIFO has a consequence for reports that can be confusing unless you know to expect it. When you run a transaction report that includes a transaction on which two different rates occurred for the same inventory item, that transaction will have separate lines on the report for each COGS or asset amount.

For example, if you recorded an invoice for the second customer in the scenario above, the transaction report would show two line items for that invoice: one with a $30 change in COGS and/or assets, and another with a $105 change in COGS and/or assets. This is intended behavior, and the report totals and subtotals will be correct.

Details
Answer ID 6381
Products QuickBooks Online Plus (H)
Categories Using This Product
Date Created 05/06/2014 02:14 PM
Date Updated 05/06/2014 02:18 PM
Allow Crawling? Yes

Resolution for Issue 'What is FIFO, and how is it used for inventory cost accounting?' available: Yes (Solved).
Source: Intuit Community forum.

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