What is the primary advantage for a company to use a FIFO method for its inventory valuation?

The primary advantage of using the FIFO (First-In, First-Out) method for inventory valuation is that it generally leads to higher profits, especially in an environment of rising prices. Under the FIFO method, the costs of the oldest inventory items are recorded as the cost of goods sold (COGS) when items are sold. Since older inventory is usually purchased at lower prices compared to more recent purchases in times of inflation, this results in a lower COGS and, consequently, a higher gross profit.

Higher profits can be beneficial for a company because they can improve financial ratios, making the company appear more attractive to investors and lenders. It can also enhance the company's cash reserves and support reinvestment in growth opportunities. While lower taxes, reduced holding costs, and better cash flow management can be effects of inventory management techniques, the most direct and immediate impact of using FIFO in a cost-inflation scenario is the increase in reported profits.