What does FIFO stand for in inventory management?

FIFO stands for "First In First Out," which is a fundamental inventory management method used in various industries, including manufacturing and retail. This system dictates that the oldest inventory items (the first in) are the ones that should be sold or utilized first (the first out).

The rationale behind this approach is to minimize the chances of inventory going stale or becoming obsolete, particularly for perishable goods or products that could become outdated quickly. For example, in a grocery store, perishable items like fruits or dairy products must be sold quickly to avoid spoilage, and using FIFO helps ensure that these items are rotated in a way that promotes freshness and reduces waste.

This method also aids in accurate accounting and inventory valuation, as it reflects a more realistic understanding of costs associated with goods sold. In periods of rising prices, FIFO results in lower cost of goods sold and higher inventory value on the balance sheet, which can impact financial reporting.

The other choices do not represent standard inventory management principles. They likely contain terms that do not have widely recognized meanings in this context, which further emphasizes the correctness of "First In First Out" as the industry standard.