Lesson 5: Inventory Valuation Methods: Introduction to FIFO (First-In, First-Out)

• What does First-In, First-Out mean in inventory valuation?
• How does FIFO assign costs to Cost of Goods Sold and Ending Inventory?
• How does FIFO affect financial statements during inflation?
• Why might a company prefer FIFO over other inventory methods?

FIFO (First-In, First-Out)
Cost Flow Assumption
Cost of Goods Sold (COGS)
Ending Inventory
Gross Profit
Net Income
Inflation
Merchandising Business
Perpetual Inventory System
Periodic Inventory System

HS.CTE.2A – Recall and apply prior knowledge for intended purpose.
HS.CTE.2B – Pose questions and make predictions about problems.
HS.CTE.2C – Apply a solution using evidence and reasoning

Students apply algebraic reasoning and proportional analysis to determine financial outcomes. They evaluate cause-and-effect relationships between variables (cost increases and profitability), strengthening analytical reasoning skills assessed on standardized exams.

Description: This lesson introduces FIFO as a cost flow assumption in inventory accounting. Students review the relationship between Beginning Inventory, Purchases, Goods Available for Sale, Ending Inventory, and COGS.

Purpose: To build procedural fluency in FIFO calculations while deepening analytical understanding of how FIFO affects profitability and financial reporting.

DOK 1
• Define FIFO.
• Which inventory costs are assigned to COGS under FIFO?

DOK 2
• Calculate COGS and Ending Inventory using FIFO.
• Explain how FIFO impacts Gross Profit when prices increase.

DOK 3
• If prices are rising, why does FIFO result in higher Net Income?
• How would FIFO affect a company’s tax liability during inflation?

DOK 4
• Evaluate whether FIFO presents a more accurate reflection of current inventory value on the balance sheet. Support your reasoning.

Students connect FIFO to real-life inventory flow examples such as grocery stores (older milk sold first), retail clothing stores, and technology products.

Students may forget that Ending Inventory reflects the most recent costs under FIFO.

• Visual inventory layering charts
• Color-coded cost layers
• Step-by-step modeling under document camera
• Guided notes with structured problem layout
• Small-group supported practice
• Excel spreadsheet model for advanced learners
• Spanish vocabulary support for ELL students
• One-on-one reteaching for cost-layer confusion

• Guided Practice Problems
• Independent FIFO Worksheet
• Exit Ticket:
“Explain why FIFO produces higher net income during inflation.”
• Short Quiz (calculation + analysis questions)
• Online gaming quiz (Kahoot / Quizizz)

Century 21 Accounting General Journal, 11th Edition (print or MindTap)
Guided Notes
Practice Worksheet
Calculator
Whiteboard for modeling cost layers
Optional: Excel demonstration model
Exit Ticket