What Is the FIFO Method?
First In, First Out (FIFO) Definition
This inventory accounting method stands in contrast with “LIFO“or “Last In, First Out”and “WAC”or “Weighted Average Cost”methods.
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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.
Their cost of goods sold for the period is therefore $3,000.
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.
What Is FIFO (First In, First Out) FAQs
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®), 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.