What is Highest In, First Out (HIFO)?
The highest-in, first-out (HIFO) inventory distribution and accounting use the inventory with the most significant acquisition cost first. As a result, the company’s records will show the most significant inventory spend for COGS and the lowest ending inventory at any given moment. GAAP does not recognize HIFO use, which is unusual.
Knowing Highest In, First Out (HIFO)
A firm’s inventory accounting choice affects financial statements and numbers.
The highest-in, first-out inventory system will likely reduce companies’ taxable income. The corporation will always record the highest cost of goods sold since used inventory is always the most expensive.
Sometimes, companies adjust their inventory practices to improve their financial success.
This differs from other inventory recognition techniques like LIFO, which records the most recently acquired goods first, and FIFO, which records the oldest inventory first. Standard inventory accounting systems include LIFO and FIFO; however, LIFO is GAAP-compliant. However, GAAP does not accept Highest In, First Out as a customary practice.
Possible Highest In, First Out Implications
Companies may utilize the HIFO approach to lower taxable revenue; however, there are certain drawbacks:
- First, because the company’s books are not GAAP-recognized, auditors may scrutinize them more and give a qualified view.
- Second, inflation may make first-take inventory obsolete.
- Third, lower-value inventory reduces net working capital. Lastly, if the firm uses asset-based loans, decreasing its inventory value would reduce its borrowing capacity.
Conclusion
- Highest-in, first-out accounts for a company’s inventory by first removing the most expensive goods.
- HIFO inventory reduces taxable revenue by realizing the most significant cost of goods sold.
- GAAP and IFRS do not recognize HIFO, which is unusual.
