“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. 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. 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 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.Example of First In, First Out
FIFO Implications
The Purpose of FIFO
First In, First Out (FIFO) FAQs
FIFO stands for First In, First Out.
“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.
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.
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.
This inventory accounting method stands in contrast with “LIFO“ or “Last In, First Out” and “WAC” or “Weighted Average Cost” methods.
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.
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