FIFO Full Form

What is the concept of the term FIFO used by asset managers or investors? What do they convey while using the term? How do businesses and manufacturers use the term? Know the term and understand it in this article.

What is the complete form of FIFO and What does it refer to?

The term FIFO is an acronym of the word “first in and first out” this term is a common term amongst investors, asset managers, and other people related to it and also for business and manufacturing, they are referring to the assets which came first in the investment portfolio of a person, goes out first. This means the assets brought and added into the portfolio before others must also be sold or dissolved. Businesses refer to their inventory of products while using this term.

Terms like FIFO came into the usage because of the tax policies, because old assets, which were not “first out” or “sold”, were put on the cost of goods sold tax.

The term is a part of practical accounting amongst asset managers. FIFO tells the recent bought and sold assets comparatively easily. It works on the concept that the last asset added into the portfolio is the last purchase from an investor. It also anticipates that assets bought first are supposed to be sold first. FIFO in business also means the first product is sold first, instead of storing or maintaining it and selling the new ones.

Is FIFO just a term or a methodology?

FIFO might be an acronym for a layman, but it is a concept or methodology used by asset managers and investors. This is a concept of selling what was bought first. Based on a quick cash flow system in the portfolio, this strategy helps clear the inventory quickly, as this concept makes the asset in and out quicker than the long term concepts. Businesses also use it in inventory management, which is explained later in this article.

How may FIFO not be a good option for investors?

When a stock or asset is bought, it is brought at some value with a hope of it increasing in future, but if suddenly market prices go down. We use the concept of first in and first out, what was brought first, would be sold first at a loss, which is practically not a good situation for traders. By this method, the ending inventory or portfolio may end up being in a loss. The prices of the old assets may be at a loss compared to new ones when the market is high.

First in and first out in manufacturing and business

The term is also used by manufacturing and business staff. When a product is made, the inventory and maintenance charges are added up into the expense, which cuts downs the profit on the product for the manufacturer, so to resolve this and exit the process, the manufacturer would try to practically sell the stuff, which was made first, and then sell other stuff, later on, to reduce all costs and keep the inflow of money also ready with getting relieve from older products.

By this process, the company’s expenses are reduced and they are able to generate comparatively a higher profit. If the new products are sold first, the prior ones would stock up and take a toll on business, which is practically not a good scenario. Therefore, any company would sell the old inventory first, get rid of it, and then the new one, to get relatively a higher income.

For example, businesses would have to keep warehouses or godowns to keep the old inventory piled up. This would not be a good scenario, as wear and tear would happen and maintenance charges go high. Also, the old inventory would be out of trend in some markets. It would only stress the owner. Therefore, the method of first in, first out is used by businesses and manufacturers. Therefore, they prefer this much above last in first out.

Conclusions

FIFO is an acronym and an actual practical accounting for inventory management methodology, for assets managers it away to sell assets are low risk and safe profits and evade long term taxes, whereas for businesses, it a completely different meaning at all, it is based on inventory, what was made first was sold first, so that it does not get stuck in warehouses, this leads to comparatively higher profits and keeps the cash flow moving in the business.