Question

Have you ever watched the way the bread company puts bread on the shelf in the grocery store? The freshest product is always placed in the back of the shelf. What type of product movement would this be? LIFO, FIFO, something else? How do firms decide on their choice of merchandise accounting method? Does it have to match the way they move items out of the building?

Answer 1

FIFO is a contraction of the term "first in, first out," and means that the goods first added to inventory are assumed to be the first goods removed from inventory for sale. LIFO is a contraction of the term "last in, first out," and means that the goods last added to inventory are assumed to be the first goods removed from inventory for sale.

Here the bread company is following the method of FIFO as the freshest product is placed in the back of the shelf and the oldest product is removed first .

First in first out is a great strategy if your products have a shelf life. That can be perishable goods like food, products that have a cycle like fashion, or products that could become obsolete like anything to do with technology. With these, you definitely want to move whatever comes into your warehouse first. If it sits on shelves while you sell newer things, you can (and probably will) lose money as it expires, goes out of fashion or is no longer the latest model. When you take the bread from your warehouse and put it in the store, you want the first lot of bread at the front of the refrigerator. There's no use putting the freshest bread in front - it will cover up the first lot of bread, customers will buy it and the bread behind will go sour.