What is FIFO?
FIFO works on two levels at once. As a physical practice, it rotates the oldest units out first, the way a grocery moves older milk to the front of the shelf. As one of several inventory valuation methods, it also sets how you value stock and calculate cost of goods sold (COGS).
It matters most for perishable or dated goods, where selling older stock first curbs waste and keeps inventory value current.
Key characteristics
- Oldest stock leaves first: the first items received are the first sold, used, or shipped.
- Costs flow in order: the cost of the oldest inventory is assigned to COGS first, so remaining stock is valued at more recent prices.
- Effect during inflation: FIFO produces a lower COGS, a higher ending inventory value, and higher taxable income. As IRS Publication 538 puts it, “In times of inflation, when prices are rising … Under FIFO, the cost of goods sold will be lower and the closing inventory will be higher.”
- Accepted internationally: FIFO is allowed under both US GAAP and IFRS. LIFO is not, and remains prohibited under IFRS: “Unlike US GAAP, IAS 2 prohibits LIFO because the International Accounting Standards Board (IASB) determined that it does not faithfully represent inventory flow patterns.”
- Fits perishable goods: FIFO helps rotate stock before it expires or becomes obsolete. For scale, a US EPA report on the cost of food waste states, “This report estimates the cost of food waste to each U.S. consumer … to be $728 per year, or $14 per week.”
Example
Picture a craft cold-brew roaster that buys green coffee in batches. In week one it buys 100 pounds at $10 a pound, then in week two it buys another 100 pounds at $15 a pound. Under FIFO, the first 100 pounds sold draw from the $10 batch, so COGS is $1,000 and the newer $15 batch stays in ending inventory.
For a hands-on walkthrough, see Fishbowl’s guide to applying FIFO in warehousing. Accurate rotation is one piece of a larger accuracy challenge. Research from IHL Group, reported by Chain Store Age on global inventory distortion, found that “the global retail loses $1.73 trillion annually due to inventory distortion (the cost of out-of-stocks and overstocks).” Fishbowl, an inventory management platform for QuickBooks and Xero users, enforces FIFO picking so counts stay accurate across locations.
Related terms
- last in, first out (LIFO): the opposite assumption, where the newest stock is sold first.
- weighted average cost: a method that values stock at a blended average cost.
- inventory accounting strategies: a broader guide to how costing methods fit together.
FAQ
Is FIFO better than LIFO?
Neither is universally better. FIFO suits perishable goods and is accepted under both US GAAP and IFRS, while LIFO is only permitted under US GAAP.
Does FIFO increase profit?
When prices rise, FIFO usually reports a lower COGS than LIFO, which raises both reported profit and taxable income.
What businesses use FIFO?
Businesses with perishable, dated, or fast-moving stock, such as food and beverage, pharmaceuticals, and many retailers, commonly use FIFO.