Highest In, First Out (HIFO)

What Is Highest In, First Out (HIFO)?

Highest in, first out (HIFO) is an inventory distribution and accounting method where the inventory with the highest cost of purchase is quick to be utilized or removed from stock. This will impact the company's books to such an extent that for some random period of time, the inventory expense will be the highest workable for the cost of goods sold (COGS), and the ending inventory will be the most reduced conceivable.

HIFO utilization is rare to non-existent and isn't recognized by GAAP.

Understanding Highest In, First Out

Accounting for inventories is an important decision that a firm must make, and how inventories are represented will impact financial statements and figures.

Companies would probably decide to utilize the highest in, first out (HIFO) inventory method to diminish their taxable income for a while. Since the inventory that is recorded as spent is generally the most costly inventory the company has (paying little heed to when the inventory was purchased), the company will continuously be recording the maximum cost of goods sold.

Companies may once in a while change their inventory methods to smooth their financial performance.

Balance this with other inventory recognition methods, for example, last in, first out (LIFO), in which the most as of late purchased inventory is recorded as utilized first, or first in, first out (FIFO), in which the most established inventory is recorded as utilized first. LIFO and FIFO are common and standard inventory accounting methods, however LIFO is part of generally accepted accounting principles (GAAP). In the mean time, HIFO isn't frequently utilized and is besides not recognized by GAAP as standard practice.

A few Highest In, First Out Implications

A company could choose to utilize the HIFO method to reduce taxable income, yet there are a few ramifications to be made aware of, including:

1. To begin with, in light of the fact that it isn't recognized by GAAP the company's books might go under greater examination by auditors and result in an assessment other than an unqualified one.
2. Second, in an inflationary environment, inventory that was taken in first might be subject to obsolescence.
3. Third, net working capital would be reduced with lower value inventory. Last yet not least, on the off chance that the company depends on asset-based loans, lower inventory value will diminish the amount it is eligible to borrow.

Features

• Highest in, first out (HIFO) is a method of accounting for a firm's inventories wherein the highest cost things are quick to be removed from stock.
• HIFO utilization is very rare and isn't recognized by broad accounting practices and rules like GAAP or IFRS.
• HIFO inventory assists a company with diminishing their taxable income since it will understand the highest cost of goods sold.