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First In, First Out (FIFO)

Definition: An accounting system used to value inventory for tax purposes. Under FIFO, inventory is valued at its most recent cost. FIFO was the traditional method used by most businesses before inflation became common. Under FIFO, the goods you receive first are the goods you sell first. Under this method, you value inventory at its most recent price. FIFO is usually used during periods of relatively low inflation since high inflation and increasing replacement costs tend to skew inventory accounting figures.