FIFO

What it means

FIFO values issues of inventory on the assumption that the units bought earliest are the first to leave. It is a convention about price, not a rule about which pallet physically goes out of the warehouse.

The Accounting Act allows FIFO or the weighted average cost where units of the same kind of stock were bought at different prices, and LIFO is not permitted in Slovakia. The chosen method belongs in the internal directive and is kept for the whole accounting period.

FIFO only settles the order in which prices flow into cost, not the price at which a receipt goes into stock. That is set by the acquisition cost, including incidental costs such as freight or customs duty. If a receipt is valued wrongly, FIFO simply carries the error faithfully into the issues of later months.

How it works in practice

In accounting software the method sits on the stock card and, together with the inventory accounting method, decides the price every issue carries. The difference only shows once purchase prices move.

When prices rise, FIFO leaves the newer and dearer units in the balance sheet and sends the older, cheaper ones to cost: reported profit and the tax base come out higher than under the average. Stock records hold the exact prices, not a folder of invoices.

A shortage found at the stocktake is issued under FIFO like any other issue, at the price of the oldest batches still in stock. If the stock card never tracked batches and the balance was patched by hand for years, nobody can work out the right price of the shortage and the difference goes to cost as an estimate that is hard to defend at an audit.

What to watch out for

The costly mistake is a purchase booked late. While the receipt carries no price, issues are valued at zero or at an old price, and once the invoice lands the whole stock history is recalculated: profit changes after the return was filed and has to be fixed by an amended return.

The method cannot be switched to produce whatever profit suits the moment. A change within the year is not allowed, and a change between periods has to be justified and described in the notes to the financial statements. A company that moves to the average for no reason risks the auditor or the tax office questioning the result and having the calculation redone.