Inventory cost-flow assumption that assigns the oldest recorded costs to units sold first.
FIFO, short for first in, first out, is an inventory cost-flow assumption that assigns the oldest recorded costs to units sold first. It affects both cost of goods sold and ending inventory.
FIFO changes reported gross profit, ending inventory value, and sometimes taxable income. In periods of rising prices, FIFO often produces lower cost of goods sold and higher ending inventory than LIFO because older, cheaper costs leave inventory first.
FIFO is a cost-flow assumption, not a claim that the physical goods literally moved first in every case. Accountants apply it to determine which inventory costs are transferred into cost of goods sold when sales happen.
Because the newest costs often remain in ending inventory under FIFO, the balance sheet can look closer to current replacement cost than it does under some other methods.
A business buys:
| Purchase Layer | Units | Unit Cost |
|---|---|---|
| First purchase | 100 | 10 |
| Second purchase | 100 | 12 |
Then it sells 120 units. Under FIFO, cost of goods sold is:
| Cost Layer Used | Amount |
|---|---|
| 100 x 10 | 1,000 |
| 20 x 12 | 240 |
| COGS | 1,240 |
Ending inventory is the remaining 80 units at 12, or 960.
FIFO is not always the same as actual warehouse flow, and it does not guarantee lower taxes. It is a reporting method whose effects depend on price trends and the framework being used.