Legal Definitions - next-in, first-out

Definition: Next-in, first-out is a method of inventory valuation where the cost of goods is based on their replacement cost rather than their actual cost. It is not a generally accepted accounting principle. It is abbreviated as NIFO. This method assumes that the most recently purchased items are the first to be sold.

Example: A store uses NIFO to value its inventory. It purchases 100 units of a product at $10 each on January 1 and 200 units of the same product at $12 each on March 1. On May 1, the store sells 150 units of the product. According to NIFO, the cost of goods sold would be calculated as follows: 100 units at $12 each and 50 units at $10 each. This means that the cost of goods sold would be $1,700 (($100 x $12) + ($50 x $10)).

Explanation: In this example, the store used the NIFO method to calculate the cost of goods sold. It assumed that the most recently purchased items (the 200 units purchased on March 1) were the first to be sold. Therefore, it used the cost of those items first when calculating the cost of goods sold. This resulted in a higher cost of goods sold than if the store had used the first-in, first-out (FIFO) method, which assumes that the oldest items are sold first.