In most accounting methods, your balance sheet shows what you paid historically, not what inventory is actually worth today. FIFO breaks this pattern by keeping your newest purchases in ending inventory, showing values close to current replacement cost. Drag the slider to see how rising or falling purchase prices affect your financial statements.
When purchase prices rise over time, FIFO allocates your oldest, cheapest costs to Cost of Goods Sold first, leaving your newest, most expensive purchases in ending inventory. This produces the highest ending inventory value on the balance sheet and the highest gross profit on the income statement. Because your ending inventory consists of recent purchases, the balance sheet figure closely approximates current replacement cost, making it economically relevant for decision-making. The physical flow assumption matches real business practices in sectors like grocery retail where older stock must move first to prevent spoilage or obsolescence.