What Is FIFO (First In, First Out)?
How the FIFO inventory method works, with a worked example.
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Quick answerFIFO (first in, first out) is an inventory valuation method that assumes the oldest goods are sold first. Cost of goods sold uses the earliest purchase costs, and closing inventory is valued at the most recent costs.
| Assumption | Oldest stock sold first |
|---|---|
| Closing inventory valued at | Latest purchase prices |
| Compare with | Weighted average cost |
FIFO in plain English
Think of a shop shelf where old stock is moved to the front. FIFO assumes the units bought first are the first ones sold, even if the physical stock is mixed. It is allowed under IFRS and widely used.
Worked example
A shop buys 100 units at 10 and later 100 units at 12. It sells 150 units.
| Item | Calculation | Amount |
|---|---|---|
| Cost of goods sold | 100 × 10 + 50 × 12 | 1,600 |
| Closing inventory | 50 × 12 | 600 |
| Total cost of goods available | 2,200 |
Common mistakes
- Valuing closing inventory at the oldest prices. Under FIFO it is valued at the newest.
- Assuming FIFO matches how goods are physically sold. It is a costing assumption.
Frequently asked questions
How does FIFO affect profit when prices are rising?
Older, cheaper costs go to cost of goods sold, so profit is higher than under weighted average cost.
Is FIFO allowed under IFRS?
Yes. IFRS allows FIFO and weighted average cost. It does not allow LIFO.
What is the difference between FIFO and LIFO?
LIFO assumes the newest goods are sold first. It is permitted in some countries’ rules but not under IFRS.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.