What Is FIFO (First In, First Out)?

FIFO (first in, first out) is an inventory method where the oldest stock is used, sold, or counted as sold first. It works on two levels: as a physical handling rule (pick the oldest units off the shelf before newer ones) and as an accounting cost-flow assumption (match the cost of the oldest purchases against sales first). It is the most widely used inventory method, and the natural opposite of LIFO, which treats the newest stock as sold first.

How FIFO works

Every time you buy stock, you create a “layer” of units at that purchase price. Under FIFO, when units leave - sold, used in a job, issued to a technician - they are drawn from the oldest layer first. Once that layer is exhausted, the next-oldest layer starts being consumed.

The consequence is simple: cost of goods sold reflects your older purchase prices, and the stock remaining on hand is valued at your most recent prices. When supplier prices are rising, FIFO therefore shows higher profit and a higher inventory value than LIFO would for the same sales.

A worked example

A workshop buys consumable blades twice in a month:

• 1st of the month: 100 blades at €2.00 each
• 15th of the month: 100 blades at €2.50 each

During the month it uses 150 blades. Under FIFO:

• The first 100 used come from the older layer: 100 × €2.00 = €200
• The next 50 come from the newer layer: 50 × €2.50 = €125
• Cost of goods used: €325
• Closing stock: 50 blades × €2.50 = €125

The remaining stock is valued at the latest price, which is usually closest to what replacing it would actually cost.

When FIFO is the right choice

FIFO is the default for good reasons:

• Perishables and dated stock - food, drink, medical supplies, adhesives, batteries. Oldest-first rotation is the only way to avoid writing off expired stock as inventory shrinkage.
• It matches reality - in most warehouses and storerooms, stock physically does move oldest-first, so the accounting mirrors the shelf.
• It is accepted everywhere - FIFO is permitted under both IFRS and US GAAP, so it travels well across borders.
• Cleaner stock valuation - the units on hand are carried at recent prices, which makes reorder budgeting and insurance values more realistic.

FIFO vs LIFO

The difference only matters when purchase prices change between buys. With rising prices, FIFO reports lower cost of goods sold, higher profit, and a higher closing stock value; LIFO does the reverse, which is why it is sometimes used in the US to defer tax. LIFO is prohibited under IFRS, so outside the US the comparison is mostly academic - FIFO or weighted average cost are the practical options.

Making FIFO work on the shelf

Accounting FIFO is automatic; physical FIFO is a habit. The patterns that hold up: date-label incoming stock on arrival, load new stock behind or below old stock (gravity racking and “back-fill, front-pick” shelving do this for you), and keep par levels realistic so stock does not sit long enough to expire. The most common failure is restocking from the front - the newest box gets picked daily while the oldest quietly ages out at the back.

Related terms

• LIFO (Last In, First Out) - the opposite cost-flow assumption, where the newest stock is treated as sold first
• Par Level - the minimum quantity to keep on hand, which controls how long stock sits
• Inventory Shrinkage - stock lost to expiry, damage, theft, or error - poor rotation feeds it
• Backorder - an order accepted while the item is temporarily out of stock
• Stockout - running out of an item entirely, the failure par levels exist to prevent