FIRST-IN, FIRST-OUT (FIFO). The FIFO cost flow assumption is based on the premise that selling the oldest
item first is most likely to mirror reality. Stores do not want inventory to grow unnecessarily old and lose
freshness. The oldest items are often placed on top in hopes that they will sell first before becoming stale or
damaged. Therefore, although the identity of the actual item sold is rarely known, the assumption is made in
applying FIFO that the first (or oldest) cost is always moved from inventory to cost of goods sold.
Note that it is not the oldest item that is necessarily sold but rather the oldest cost that is reclassified to cost of
goods sold. No attempt is made to determine which shirt was purchased by the customer. Here, because the first
shirt cost $50, the following entry is made to record the expense and reduce the inventory.
Journal Entry—Reclassification of the Cost of One Piece of Inventory Using FIFO
For this retail store, the following financial information is reported if FIFO is applied. Two shirts were bought for
($50 and $70) and one shirt was sold for $110.
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