First In, First Out (FIFO) is a widely used inventory valuation and accounting method. Under the FIFO assumption, it is presumed that the inventory acquired first is also the first to be sold or used in production. This method can have a significant impact on financial statements, especially in times of varying input costs.

For instance, if a company acquires inventory at different prices due to fluctuations in market rates, the cost of goods sold (COGS) is valuated using the cost of the oldest inventory items. This often provides a higher profit during periods of rising prices since older, lower-cost inventory gets sold first, leaving higher-cost inventory on hand.

Let's say a bakery purchases flour in January for $5 per bag, and in March, the price rises to $6 per bag. When calculating the cost of goods sold for April using FIFO, the bakery would begin with the $5 per bag cost until that stock is depleted, and only then move on to the $6 per bag cost.