Financial Dictionary - FIFO
This is an accounting valuation method used to calculate the value of an inventory, or similar units, in relation to its cost and sale price. This inventory may be the company's products, the raw materials it uses for its work, or the components necessary to carry out this activity in the normal way. The FIFO criterion is commonly used when valuing inventories made up of expired or perishable products. It confirms the necessary order so that all the items that enter first, are released as soon as close as possible to their expiry date or obsolescence period.
This system is used for tax calculations under tax regulations in force in Spain.
FIFO applied to the investment ecosystem
The investor should take into account that FIFO rules (First in, First out) apply to the calculation of capital gains from the sale of units in a fund, i.e. the first units that entered the portfolio are sold first.
FIFO in inflation periods
In inflation periods, i.e. when there is an economic imbalance caused by production and demand which encourages the prices of products and services to rise, and the price of money used to buy or use them to fall, the FIFO variable acts as a method which increases profits due to allocating a lower cost to the goods sold, which is positive when presenting results to shareholders, creditors, etc. but negative when paying taxes.