Next In, First Out (NIFO)

What Is Next In, First Out (NIFO)?

Next In, First Out (NIFO) is a method of esteeming inventory where the cost of a thing depends on its replacement cost as opposed to its original cost.

The Next In, First Out form of valuation doesn't conform to generally accepted accounting principles (GAAP). This is on the grounds that NIFO is said to abuse the cost principle, accounting concept which states that goods and services ought to be recorded at original cost, not present market value.

Understanding Next In, First Out (NIFO)?

A few companies use Next In, First Out when inflation is a factor. Companies will set a selling price on a replacement-cost basis and utilize this method as a method for evaluating the things it sells.

Despite the fact that NIFO doesn't conform to GAAP, numerous financial analysts and business managers favor the economic reasoning behind the method. As a cost flow assumption technique, by expressing that the cost assigned to a product is the cost required to supplant it, NIFO can offer a more pragmatic valuation method businesses will really see during normal operations.

For instance, the traditional methods of Last In, First Out (LIFO) and First In, First Out (FIFO) can become twisted during inflationary periods. Utilizing accounting methods in light of these principles during inflationary conditions can delude business managers. Consequently, numerous businesses will involve NIFO for internal purposes during these periods and report results utilizing LIFO or FIFO on their evaluated financial statements.

Illustration of Next In, First Out (NIFO)

Assume a company sells a toy gadget for $100. The original cost of the gadget was $47, which would bring about a reported profit of $53.

At the hour of the sale, the replacement cost of the gadget was $63. Assuming the company were to charge $63 for the cost of goods sold under the NIFO concept, the reported profit would decline to $37.

Features

• Next In, First Out (NIFO) is a method of valuation where the cost of a thing depends on its replacement cost as opposed to its original cost.
• To reflect genuine business conditions, companies might utilize NIFO internally when inflation is a factor and replacement cost is higher than a thing's original cost.
• NIFO doesn't conform to generally accepted accounting principles.