CandleFocus

Next-In, First-Out (NIFO)

Candlefocus Editor

Next-In, First-Out (NIFO) is an inventory cost flow assumption which determines the value of inventory based on the most recently acquired items first, replacing the oldest items in the inventory when there is a demand. This cost flow assumption is often used when there is an inflationary environment, as the cost of replacing older items is the cost of the present market value. Under this cost flow assumption, the items leaving inventory are the oldest and the items added to inventory are the newest.

The advantages of NIFO include the following:

• It reflects changing market conditions where prices may be increasing due to inflation on a day-to-day basis. Therefore it is a more realistic accounting cost concept in matching inflationary periods;

• It allocates the cost of goods sold to the items that have been purchased more recently reflecting actual business expense.

• It increases inventory turnover and improves cash flow by requiring items to be reinvested in newer items more frequently.

The primary disadvantage of using NIFO is that the company’s financial statements may not provide accurate information concerning actual inventory costs. Inventory costs used for valuation purposes according to NIFO do not generally conform to the generally accepted accounting principles, which require inventory to be recorded at the original cost of the items.

In conclusion, the NIFO method of inventory valuation may provide more realistic results under certain conditions. Companies should carefully consider the pros and cons in using this method before making the decision of using it as a means of inventory valuation.

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