FIFO

Intermediate

FIFO, which stands for first in, first out, is an inventory costing method that assumes the oldest items in stock are sold first, so the cost of goods sold reflects older prices and remaining inventory reflects newer ones.

When a business buys identical items at different prices, it needs a rule for deciding which cost to assign to the items sold. FIFO assumes the earliest purchases are used up first.

For example, a shop buys 100 units at 10 each and later 100 more at 12 each. It then sells 120 units. Under FIFO, the cost of goods sold is 100 units at 10 plus 20 units at 12, a total of 1,240. The remaining 80 units are valued at 12 each, or 960.

When prices are rising, FIFO gives a lower cost of goods sold and therefore higher reported profit than methods that use more recent costs. It also values remaining inventory closer to current prices, which makes the balance sheet more up to date.

FIFO is permitted under both IFRS and US GAAP and often matches how goods physically move, especially for perishable items. An alternative, LIFO, which assumes the newest items are sold first, is allowed under US GAAP but not under IFRS. The weighted average cost method is another common choice.

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