What does the FIFO method dictate about stock rotation?

The FIFO method, which stands for "First In, First Out," dictates that the oldest stock should be sold first. This inventory management approach is rooted in the idea that the first items added to inventory are also the first to be sold. This is particularly important in businesses dealing with perishable goods or items that may become outdated or obsolete quickly, as it helps minimize waste and ensures that older stock is moved out before it becomes unsellable.

Using the FIFO method allows a business to more accurately match its costs of goods sold with the revenue from sales, especially in an environment where prices may be rising over time. This method can also support better inventory control and cash flow management.

In contrast to the other available choices, such as randomly selecting stock or selling the newest stock first, FIFO provides a systematic approach to inventory management that aligns with sound accounting practices. Keeping stock indefinitely does not adhere to FIFO principles and would not typically reflect the operational realities of a business.