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What is a potential disadvantage of using the FIFO method?

Practice Questions

Q1
What is a potential disadvantage of using the FIFO method?
  1. It can lead to inventory obsolescence.
  2. It results in lower net income.
  3. It is more complex to implement.
  4. It does not reflect current market conditions.

Questions & Step-by-Step Solutions

What is a potential disadvantage of using the FIFO method?
  • Step 1: Understand what FIFO means. FIFO stands for 'First In, First Out'. This means that the oldest inventory items are sold before the newer ones.
  • Step 2: Consider what happens to older inventory. If older items are sold first, they may not be as popular or may become outdated.
  • Step 3: Think about inventory obsolescence. This means that some items may not sell at all and could become unsellable or worthless over time.
  • Step 4: Realize the disadvantage. Because FIFO sells older items first, it can lead to having unsold, outdated inventory that cannot be sold.
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