First In, First Out (FIFO)

Written by True Tamplin, BSc, CEPF®

Updated on January 02, 2023

“FIFO,” or First In, First Out, is a method of inventory accounting which expenses the first inventory received prior to later inventory when calculating the cost of goods sold.

This inventory accounting method stands in contrast with “LIFO“ or “Last In, First Out” and “WAC” or “Weighted Average Cost” methods.

Example of First In, First Out

FIFO Justice buys 3 sets of 1,000 wristbands fighting for justice for $1.70 each, then $1.30 each, then $2.00 each. FIFO Justice determines it has sold 2,000 units for the period.

When calculating their cost of goods sold under FIFO, the 2,000 wristbands bought for $1.70 each and $1.30 each will be included, but not the 1,000 wristbands for $2.00 each.

Their cost of goods sold for the period is therefore $3,000.

FIFO Implications

In periods of falling inventory costs, a company using FIFO will have a lower gross profit because their cost of goods sold is based on older, more expensive inventory.

In periods of rising costs, that company will have a greater gross profit because their cost of goods sold is based on older, cheaper inventory.

The Purpose of FIFO

The goal of any inventory accounting method is to represent the physical flow of inventory.

FIFO is the most commonly used inventory accounting method because most companies sell older inventory first, like in the case of milk at a grocery store.

It is the preferred method for US Financial Reporting and is the only acceptable method in International Financial Reporting.

First In, First Out (FIFO) FAQs

What does FIFO stand for?

FIFO stands for First In, First Out.

What is FIFO?

“FIFO,” or First In, First Out, is a method of inventory accounting which expenses the first inventory received prior to later inventory when calculating the cost of goods sold.

What are the implications of using FIFO in inventory accounting?

In periods of falling inventory costs, a company using FIFO will have a lower gross profit because their cost of goods sold is based on older, more expensive inventory. In periods of rising costs, that company will have a greater gross profit because their cost of goods sold is based on older, cheaper inventory.

Why is FIFO the most commonly used inventory accounting method?

FIFO is the most commonly used inventory accounting method because most companies sell older inventory first, like in the case of milk at a grocery store. It is the preferred method for US Financial Reporting and is the only acceptable method in International Financial Reporting.

What are two other accounting methods?

This inventory accounting method stands in contrast with “LIFO“ or “Last In, First Out” and “WAC” or “Weighted Average Cost” methods.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.