FIFO Method

Under FIFO, the first costs inventoried are the first costs transferred to cost of goods sold. Ending inventory includes the most recently incurred costs; thus, the ending inventory balance approximates replacement cost. In periods of rising prices, income may be overstated because the FIFO method results in the highest ending inventory, the lowest costs of goods sold, and the highest net income (current costs are not matched with current revenues). See also specific identification method and weighted average method and moving average method and LIFO method.