First In, First Out (FIFO) is an inventory valuation method where the earliest goods purchased are assumed to be sold first. In Singapore accounting, it is commonly used to calculate cost of goods sold and ending inventory. As a result, it often reflects inventory flows that mirror actual business operations.
When it matters
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When valuing inventory in financial statements.
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When calculating cost of goods sold and gross profit.
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When preparing accounts under Singapore Financial Reporting Standards (SFRS).
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When assessing the impact of price changes on profitability.
Therefore, it directly affects reported profits and inventory values.
How First In, First Out works
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Inventory purchased first is recorded as sold first.
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Newer inventory remains in closing stock.
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Costs flow in chronological order, not based on physical movement.
Meanwhile, it is an accounting assumption and may differ from actual stock handling.
FIFO vs other inventory methods
| Method | Key feature | Typical impact |
|---|---|---|
| First In, First Out | Oldest costs sold first | Higher profit when prices rise |
| Weighted Average | Average cost per unit | Smoother profit margins |
| Last In, First Out (LIFO) | Not allowed under SFRS | — |
However, Singapore companies cannot use LIFO under SFRS.
Key requirements & process (Singapore)
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Select FIFO as part of the company’s inventory accounting policy.
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Apply the method consistently across financial periods.
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Ensure inventory records support FIFO calculations.
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Disclose the inventory valuation method in financial statements.
Consequently, changes in method require justification and disclosure.
Worked example (SG context)
A retailer buys 100 units at S$10 each in January and another 100 units at S$12 each in March. The company sells 120 units by year-end. Under FIFO, the cost of goods sold includes 100 units at S$10 and 20 units at S$12. As a result, closing inventory reflects the newer purchases.
Common pitfalls & tips
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Switching inventory methods to manage profits.
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Poor inventory tracking that undermines FIFO accuracy.
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Forgetting to disclose valuation methods in accounts.
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Assuming FIFO always results in lower tax.
Therefore, companies should align inventory methods with operational reality.
FAQs
Q1. Is FIFO allowed under Singapore accounting standards?
A1. Yes. it is permitted and commonly used under SFRS.
Q2. Does FIFO affect cash flow?
A2. No. It affects accounting profit, not actual cash flow.
Q3. Is FIFO suitable for all businesses?
A3. No. Some businesses prefer weighted average due to inventory complexity.
Q4. Can a company change from FIFO to another method?
A4. Yes. However, changes must be justified, applied consistently, and disclosed.
Q5. Does IRAS require a specific inventory method?
A5. IRAS generally follows accounting treatment, provided it is reasonable and consistent.