FIFO Method
An inventory valuation approach assuming oldest items are sold first, closely matching physical flow in many businesses and typically reflecting current replacement costs.
FIFO Method
An inventory valuation approach that assumes the first items purchased or produced are the first items sold or used, regardless of actual physical flow, resulting in ending inventory consisting of the most recently acquired items.
For instance, if a retailer purchases 100 units at $8 in January, 150 units at $10 in February, and sells 120 units during the period, FIFO would assign $8 to the first 100 units sold and $10 to the remaining 20 units, resulting in cost of goods sold of $1,000 and ending inventory of $1,300 (130 units at $10).
First-In, First-Out (FIFO) often mirrors actual physical flow in many businesses, particularly those selling perishable or dated products. During inflation, FIFO typically results in lower cost of goods sold and higher reported profits than LIFO, as older, less expensive inventory costs flow to the income statement. Ending inventory reflects most recent prices, approximating current replacement cost on the balance sheet. FIFO is accepted under both GAAP and IFRS, making it widely used internationally, particularly in industries with relatively stable or declining prices or where products have limited shelf lives.