When purchase costs are rising, FIFO will report the lowest cost of goods sold yielding the highest gross profit and net income.
FIFO is one method for monitoring closing inventory. The inventory is recorded at the new cost because it is first in, first out when it is recorded. Because the inventory with the lowest cost will be used up first, the inventory purchased last will be recorded, which will increase revenue or decrease the cost of goods sold depending on the circumstance.
When prices are rising, the more expensive, newer inventory is kept on the balance sheet. Since COGS are calculated using inventory that may be several years old and was purchased at a lower price, FIFO can boost net profitability.
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