What Is FIFO Inventory?
FIFO (first in, first out) is an inventory method in which the oldest stock is sold or used first. For accounting, cost of goods sold is calculated from the cost of the earliest purchases, and ending inventory is valued at the most recent costs.
How FIFO Works
FIFO is used in two ways. Most businesses apply both at once.
FIFO Costing
An accounting method. Each purchase is kept as a cost layer, and sales use up the oldest layer first when calculating cost of goods sold.
FIFO Stock Rotation
A warehouse practice. Older stock is placed where it gets picked first, so nothing sits long enough to expire, spoil, or go out of date.
FIFO Formula
Cost of Goods Sold = (Units from oldest layer × its cost) + (Units from next layer × its cost) + …
Keep taking units from the oldest remaining layer until the quantity sold is covered. Whatever is left over is ending inventory, valued at the newest costs.
FIFO Inventory Example
A specialty food distributor buys cases of olive oil three times in the first quarter while supplier prices rise. In March it sells 300 cases at $60 each.
| Purchase | Cases | Cost / Case | Layer Cost | Sold (FIFO) | Cost of Sold |
|---|---|---|---|---|---|
| Jan 5 · Layer 1 | 100 | $40 | $4,000 | 100 | $4,000 |
| Feb 10 · Layer 2 | 150 | $44 | $6,600 | 150 | $6,600 |
| Mar 15 · Layer 3 | 200 | $48 | $9,600 | 50 | $2,400 |
| Total | 450 | $20,200 | 300 | $13,000 |
Under FIFO, the 300 cases sold use up all of layers 1 and 2 plus 50 cases from layer 3, for a cost of goods sold of $13,000. The remaining 150 cases are valued at the newest cost of $48, for ending inventory of $7,200. Revenue of $18,000 minus $13,000 gives a gross profit of $5,000.
FIFO vs. LIFO vs. Weighted Average
Using the same olive oil purchases and 300 cases sold, each method produces a different result:
| FIFO | LIFO | Weighted Average | |
|---|---|---|---|
| Costs Used First | Oldest | Newest | Average of all |
| Cost of Goods Sold | $13,000 | $14,000 | $13,467 |
| Ending Inventory | $7,200 | $6,200 | $6,733 |
| Gross Profit | $5,000 | $4,000 | $4,533 |
| US GAAP | Allowed | Allowed | Allowed |
| IFRS | Allowed | Not allowed | Allowed |
Weighted average cost is $20,200 ÷ 450 cases = $44.89 per case. When prices are falling, the order reverses and FIFO shows the highest cost of goods sold.
Benefits of FIFO
Matches How Goods Move
Most businesses ship older stock first, so the cost records follow the physical flow of goods.
Less Spoilage and Obsolescence
Rotating stock keeps products from expiring on the shelf or going out of style.
Current Balance Sheet Values
Ending inventory is valued at recent costs, so it is close to what it would cost to replace today.
Accepted Worldwide
FIFO is allowed under both US GAAP and IFRS, which keeps reporting simple for businesses selling internationally.
How to Use FIFO in Your Business
- 1Record every receipt with date and cost. Each purchase becomes its own cost layer, including freight and landed costs.
- 2Label stock by receipt or lot. Use lot numbers or received dates so staff can tell old stock from new.
- 3Set up the shelves for rotation. Put new stock behind or below older stock, or use flow racks that load from the back.
- 4Direct picks to the oldest stock. Pick lists should name the bin or lot to pull, so the choice isn't left to the picker.
- 5Post costs automatically. Let your system relieve the oldest cost layer on each shipment and update accounting at the same time.
- 6Check it with regular counts.Cycle counts confirm that the lots on the shelf match the layers in the system.
Common FIFO Mistakes to Avoid
FIFO only works when the records and the shelves follow the same order.
Stocking New Goods in Front
When new stock goes on top, pickers grab it first and older stock ages at the back.
Leaving Out Landed Costs
Freight, duties, and handling belong in each layer's cost. Leaving them out understates cost of goods sold.
Tracking Layers in Spreadsheets
Manual layer math breaks down quickly with many SKUs, partial shipments, and returns.
Using FIFO When FEFO Is Needed
For dated goods, a later receipt can expire sooner. Pick by expiration date when shelf life varies.
Which Industries Use FIFO?
FIFO is the most common inventory method for small and mid-sized businesses. It matters most in:
Food Services
Perishable ingredients that must be used before they spoil.
Distribution
Frequent purchases at changing prices across many SKUs.
Health & Beauty
Cosmetics and supplements with limited shelf life.
Healthcare
Medical supplies and sterile goods with expiration dates.
Manufacturing
Raw materials issued to production in the order received.
Apparel
Seasonal styles that lose value the longer they sit.
FIFO in Kechie ERP
Kechie Inventory Management records each receipt with its date, cost, and lot, so stock can be picked and costed in FIFO order. When an order ships, inventory and the general ledger in accounting update together. Because procurement, order management, and manufacturing share the same data, purchase costs flow straight through to margins and reports.
Frequently Asked Questions
What does FIFO mean in inventory?
FIFO stands for first in, first out. The first items you receive are the first ones you sell or use, and their cost is the first cost charged to cost of goods sold.
How do you calculate FIFO?
Start with the oldest purchase layer and multiply units sold by that layer's cost. When the layer runs out, move to the next oldest layer. Add the layers together to get cost of goods sold.
What is the difference between FIFO and LIFO?
FIFO charges the oldest costs to cost of goods sold first. LIFO (last in, first out) charges the newest costs first. When prices are rising, FIFO shows lower cost of goods sold and higher profit than LIFO.
Is FIFO required by GAAP or IFRS?
FIFO is allowed under both US GAAP and IFRS. LIFO is allowed under US GAAP but not under IFRS. Talk to your accountant about which method fits your business.
What is the difference between FIFO and FEFO?
FIFO picks stock in the order it was received. FEFO (first expired, first out) picks the stock with the earliest expiration date first, even if it arrived later. FEFO is common for food and pharmaceuticals.
Can you use FIFO for costing but pick stock differently?
Yes. FIFO costing is an accounting assumption. Warehouse staff can still pick by expiration date or location, although physical FIFO rotation is usually best for perishable goods.
Can a business change from LIFO to FIFO?
Yes, but a change in inventory method usually requires disclosure in financial statements and, in the US, IRS approval using Form 3115. Plan the change with your accountant.
Does FIFO affect taxes?
It can. When costs are rising, FIFO produces a lower cost of goods sold and higher taxable income than LIFO. When costs are falling, the effect reverses.
Related Guides
See FIFO Inventory in Kechie ERP
Track every receipt, rotate stock, and see accurate costs and margins in one system.