In which inventory method are the oldest items typically sold first?

The method where the oldest items are typically sold first is known as FIFO, which stands for "First In, First Out." In inventory management, FIFO assumes that the first items purchased are the first ones sold. This approach is grounded in the idea of food or perishable goods, where older stock needs to be sold before it spoils.

When applying FIFO, the cost of goods sold reflects the cost of the oldest inventory items, whereas the remaining inventory consists of the more recently acquired items. This method is particularly relevant in industries where the inventory can become obsolete or not sellable over time. FIFO can lead to higher ending inventory values during inflationary periods, as the most recent, usually higher-priced items remain on the balance sheet.

Understanding FIFO and its impact on financial statements helps businesses in budgeting and forecasting, as it directly affects both net income and tax implications.