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Definition

At the end of the accounting period, stock (also called "inventory") must be valued to determine the company's "cost of sales". The usual calculation for cost of sales is: Opening Stock plus Purchases minus Closing Stock. There are a variety of methods for calculating closing stock and the method chosen can have a major impact on the company's cost of sales and hence on its profit. First In First Out (FIFO) makes the assumption that the oldest stock in the warehouse is the stock that is used first. This means that the stock which remains at the end of the financial year is the more-recently purchased stock which is usually also the most costly stock. The opposite is true for Last In First Out (LIFO) which assumes that the most recently purchased and usually the most expensive stock is used first, leaving the older less expensive stock for the closing stock figure. The method itself does not matter that much, but if the company changes from one method to another, then that can impact profits either positively or negatively. Check the notes to the accounts to ensure that the method has not been changed.

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