First-in-first-out (FIFO) is a method used by merchandising companies to manage their inventory and cost flow. A company using this method will assume that the first inventory in is the inventory that sells first and will track their cost of goods sold according to this assumption. To come up with the cost of goods sold using FIFO, a company will determine the cost of the oldest inventory and multiply it by the units sold. If the cost for the same item fluctuates, the amount of inventory acquired at a certain price needs to be taken into consideration.

Obsolescence, price-level changes, or damaged goodsdecrease in market value of inventory should have been adjusted for the computation of Net realizable value.

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