Next In, First Out (NIFO)
Next In, First Out (NIFO) is a method of valuing inventory where the cost of an item is based upon its replacement cost rather than its original cost. Next In, First Out (NIFO) is a method of valuation where the cost of an item is based upon its replacement cost rather than its original cost. Next In, First Out (NIFO) is a method of valuing inventory where the cost of an item is based upon its replacement cost rather than its original cost. As a cost flow assumption technique, by stating that the cost assigned to a product is the cost required to replace it, NIFO can offer a more practical valuation method businesses will actually see during normal operations. To reflect actual business conditions, companies may use NIFO internally when inflation is a factor and replacement cost is higher than an item's original cost.
What Is Next In, First Out (NIFO)?
Next In, First Out (NIFO) is a method of valuing inventory where the cost of an item is based upon its replacement cost rather than its original cost.
The Next In, First Out form of valuation does not conform to generally accepted accounting principles (GAAP). This is because NIFO is said to violate the cost principle, accounting concept which states that goods and services should be recorded at original cost, not present market value.
Understanding Next In, First Out (NIFO)?
Some companies use Next In, First Out when inflation is a factor. Companies will set a selling price on a replacement-cost basis and use this method as a way to price the items it sells.
Although NIFO doesn't conform to GAAP, many economists and business managers prefer the economic rationale behind the method. As a cost flow assumption technique, by stating that the cost assigned to a product is the cost required to replace it, NIFO can offer a more practical valuation method businesses will actually see during normal operations.
For example, the traditional methods of Last In, First Out (LIFO) and First In, First Out (FIFO) can become distorted during inflationary periods. Using accounting methods based on these principles during inflationary environments can mislead business managers. Hence, many businesses will use NIFO for internal purposes during these periods and report results using LIFO or FIFO on their audited financial statements.
Example of Next In, First Out (NIFO)
Suppose a company sells a toy widget for $100. The original cost of the widget was $47, which would result in a reported profit of $53.
At the time of the sale, the replacement cost of the widget was $63. If the company were to charge $63 for the cost of goods sold under the NIFO concept, the reported profit would decline to $37.
Related terms:
Accounting
Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business to oversight agencies, regulators, and the IRS. read more
Average Cost Flow Assumption
Average cost flow assumption is a calculation companies use to assign costs to inventory goods, cost of goods sold (COGS) and ending inventory. read more
Cost of Goods Sold – COGS
Cost of goods sold (COGS) is defined as the direct costs attributable to the production of the goods sold in a company. read more
Ending Inventory
Ending inventory is a common financial metric measuring the final value of goods still available for sale at the end of an accounting period. read more
First In, First Out (FIFO)
First-in, first-out (FIFO) is a valuation method in which the assets produced or acquired first are sold, used, or disposed of first. read more
Full Costing
Full costing is a managerial accounting method that describes when all fixed and variable costs are used to compute the total cost per unit. read more
Generally Accepted Accounting Principles (GAAP)
GAAP is a common set of generally accepted accounting principles, standards, and procedures that public companies in the U.S. must follow when they compile their financial statements. read more
Last In, First Out (LIFO)
Last in, first out (LIFO) is a method used to account for inventory that records the most recently produced items as sold first. read more
Net Realizable Value (NRV)
Net realizable value is the value of an asset that can be realized upon its sale, minus a reasonable estimation of the costs involved in selling it. read more
Replacement Cost
A replacement cost is an amount that it would cost to replace an asset of a company at the same or equal value. read more