First-in First-out (FIFO) valuation method

The first-in first-out (FIFO) method assumes that when items are removed from inventory, the inventory account is reduced by the cost of the first item acquired in inventory. This method more closely mirrors the actual physical inventory process. Assuming that the costs to acquire inventory are subject to inflation, a FIFO cost flow assumption results in lower cost of goods sold, higher net income, and thus a higher tax liability.