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.

What you will learn

• What FIFO means (and other meanings of FIFO)
• How FIFO works
• How to calculate FIFO step by step
• A worked example with three purchase layers
• Periodic vs perpetual FIFO
• When FIFO is the right choice
• FIFO vs FEFO vs LIFO (and weighted average)
• Advantages and disadvantages of FIFO
• FIFO in the warehouse and storeroom
• FAQ

What FIFO means (and other meanings of FIFO)

FIFO = first in, first out. The rule in one line: whatever came in first goes out first. In inventory terms, the oldest units leave the shelf first and the oldest purchase costs leave the books first.

The acronym has two other common meanings, so if you landed here with one of those in mind:

• Computing - a FIFO is a queue or buffer that outputs data in exactly the order it arrived, like a queue at a till.
• Employment - mainly in Australia, FIFO means fly-in fly-out work, where staff fly to a remote site (often mining) for a roster and then fly home.

This page covers the inventory and accounting meaning: how first in, first out values stock, how to calculate it, and how to run it physically.

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 lower cost of goods sold, higher profit, and a higher inventory value than LIFO or weighted average would for the same sales. When prices are falling, the effect reverses.

How to calculate FIFO step by step

There is no single “FIFO formula” to plug numbers into - it is a sequence of steps over your inventory layers:

1. List your purchase layers in date order, each with its quantity and unit cost. Include any opening stock as the oldest layer.
2. Take the units sold or used from the oldest layer first. When that layer runs out, move on to the next-oldest.
3. Add up the cost of the layers consumed. That total is your FIFO cost of goods sold (COGS).
4. Value what is left at the newest costs. The remaining units sit in the most recent layers, and that is your ending inventory.
5. Check the result. Beginning inventory + purchases - COGS = ending inventory. If it does not balance, a layer has been missed or double-counted.

The only data you need is the quantity and unit cost of each receipt, in the order it arrived - which is why a reliable receiving record matters more than the arithmetic.

A worked example with three purchase layers

A workshop starts the month with no stock of a consumable blade and buys three times:

During the month it uses 220 blades. Under FIFO:

• The first 100 come from the oldest layer: 100 × €2.00 = €200
• The next 100 come from the middle layer: 100 × €2.50 = €250
• The last 20 come from the newest layer: 20 × €2.80 = €56
• FIFO cost of goods used: €506
• Ending inventory: 80 blades × €2.80 = €224
• Check: €0 + €730 - €506 = €224

The same numbers under the other common cost-flow assumptions (calculated at period end):

With prices rising through the month, FIFO gives the lowest cost and the highest closing stock value, LIFO the reverse, and weighted average sits in between. The remaining FIFO stock is valued at the latest price, which is usually closest to what replacing it would actually cost.

Periodic vs perpetual FIFO

There are two ways to run the numbers:

• Periodic FIFO works out cost of goods sold once, at the end of the period, from a physical inventory count or stocktake: opening stock plus purchases minus what is still on the shelf.
• Perpetual FIFO works it out on every issue or sale, from a running record of receipts and issues, so the stock figure is always current. Cycle counts then check the running record against the shelf.

Here FIFO has a useful property that LIFO and weighted average do not: it gives the same cost of goods sold and ending inventory under both systems. The oldest layer is always consumed first, whether you apply the rule after each issue or once at month end. Under LIFO or a moving average, the timing of each issue relative to each purchase changes the answer.

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 or dead stock.
• 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 FEFO vs LIFO (and weighted average)

The four approaches answer different questions. FIFO, LIFO and weighted average are cost-flow assumptions for the books; FEFO is purely a physical picking rule.

FIFO vs FEFO. Most of the time they pick the same box. The difference appears when a newer delivery carries an earlier expiry date than stock already on the shelf: FEFO catches it and issues it first, while FIFO would leave it to expire. That is why pharma and food operations run FEFO, and why hybrid setups are common - FEFO for dated lines, FIFO for everything else, with FIFO still used for costing.

FIFO vs LIFO. The difference only matters when purchase prices change between buys. With rising prices, LIFO charges the newest, dearest costs to cost of goods sold first, which lowers reported profit and therefore taxable profit - that is why some US businesses use it. LIFO is prohibited under IFRS, so outside the US the practical choice is between FIFO and weighted average cost, the middle option that smooths price swings.

Advantages and disadvantages of FIFO

Advantages

• Follows how most stock physically moves, so the books and the shelves agree.
• Values the balance sheet close to current replacement cost, because closing stock sits in the newest layers.
• Accepted under IFRS and US GAAP.
• Simple to follow and to audit: every unit of cost traces back to a dated receipt.
• Gives the same result under periodic and perpetual systems.

Disadvantages

• When prices rise, profit is flattered by older, cheaper costs - and taxable profit rises with it. Some of that “profit” is simply inflation that will be paid out again at the next reorder.
• Current revenue is matched against old costs, so margins can look healthier than today’s prices justify.
• Many small layers are fiddly to track by hand; without a running record of receipts and unit prices, the calculation turns into an invoice hunt.

Under IFRS, IAS 2 (Inventories) sets the frame: inventory is measured at the lower of cost and net realisable value, FIFO or weighted average may be used for interchangeable items, and items that are not interchangeable - or are bought for a specific project - must use specific identification of their individual costs. If stock has aged, been damaged or dropped in value, it may need writing down below its FIFO cost, which is where an asset write-off or a revised asset valuation comes in.

FIFO in the warehouse and storeroom

Accounting FIFO is arithmetic; physical FIFO is a habit. This checklist is what keeps stock rotating:

• Label on receipt - put the receiving date (or batch number) on every box, case or bin as it arrives, not later.
• Back-fill, front-pick - load new stock behind or below old stock so the oldest unit is always the easiest to reach.
• Use racking that enforces the flow - flow or gravity racking loads from the back and picks from the front, and drive-through racking separates the loading and picking sides. These are generic options available on the market; on a small shelf, a clear front-pick rule does the same job.
• Keep one batch per bin where you can - mixed batches in one location are where rotation quietly breaks down.
• Quarantine separately - give damaged, returned or near-expiry stock its own location so it is not picked by mistake.
• Set realistic stock targets - sensible par levels, reorder points and safety stock stop stock sitting long enough to age.
• Count little and often - cycle counts catch aged stock at the back before it expires.

The common failures are predictable: restocking from the front, so the newest box gets picked daily while the oldest ages out at the back; mixing batches in one bin; and having no receiving date on record, which makes both rotation and FIFO costing guesswork. In service businesses the same discipline applies to consumables such as blades, filters, batteries, first-aid kit refills and kegs.

FAQ

What does FIFO stand for? FIFO stands for first in, first out. In inventory and accounting it means the oldest stock is used or sold first, and its cost is matched against sales first. The same acronym is used in computing for a queue or buffer that outputs data in the order it arrived, and in employment (mainly in Australia) for fly-in fly-out work.

How do you calculate FIFO? List your purchase layers oldest to newest with quantity and unit cost. Take the units sold or used from the oldest layer first, then the next oldest, and add up those costs to get cost of goods sold. Whatever is left is ending inventory, valued at the newest purchase costs. Check the result: beginning inventory plus purchases minus cost of goods sold should equal ending inventory.

What is the difference between FIFO and FEFO? FIFO issues stock in order of receipt date; FEFO (first expired, first out) issues it in order of expiry date. They usually agree, but when a newer delivery carries an earlier expiry date, FEFO picks it first and FIFO does not. Use FEFO for dated goods such as medicines, food, adhesives and some batteries, and FIFO for stable stock.

Is FIFO a physical rule or an accounting method? Both, and the two are independent. Physically, FIFO means rotating stock so the oldest units are picked first - essential for anything that expires or degrades. In accounting, FIFO is a cost-flow assumption: the cost of the oldest purchases is matched against sales first. A business can rotate stock oldest-first on the shelf while using a different costing method on paper, though for most small businesses the two simply align.

Is FIFO allowed under IFRS and US GAAP? Yes. FIFO is accepted under both IFRS (IAS 2) and US GAAP, which is one reason it is the default choice for most businesses. Its counterpart LIFO is permitted under US GAAP but prohibited under IFRS, so companies that report internationally generally standardise on FIFO or weighted average cost.

Does FIFO give the same result under periodic and perpetual inventory? Yes. Because FIFO always consumes the oldest layer first, it does not matter whether you work out cost of goods sold once at period end or on every issue - cost of goods sold and ending inventory come out the same. LIFO and weighted average can give different figures under the two systems.

When should a business use FIFO? Use FIFO whenever stock ages: food and drink, medical supplies, batteries, adhesives, chemicals, and anything with a shelf life or version number. It also suits businesses that want their balance sheet to reflect recent prices, since the units left in stock are valued at the latest purchase costs. If your stock genuinely moves oldest-first, FIFO keeps the books and the shelves telling the same story.

The takeaway

FIFO means first in, first out: the oldest stock leaves the shelf first and the oldest purchase costs leave the books first. To calculate it, consume your purchase layers oldest to newest, total the cost of what was used, and value the rest at the newest prices. It is accepted under IFRS and US GAAP, gives the same answer under periodic and perpetual systems, and in rising markets shows higher profit and a higher stock value than LIFO or weighted average. For dated goods, pair it with FEFO on the shelf. Either way, the whole method rests on knowing what you received, when, and at what unit price.

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
• Reorder Point - the stock level that triggers a new order, so stock arrives before it runs out but not so early that it ages
• Inventory Shrinkage - stock lost to expiry, damage, theft, or error - poor rotation feeds it
• Cycle Count - counting a small slice of stock regularly, which catches aged units early
• 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

Tools that make this easier

FIFO only works if you know what arrived, when, and at what price. AMPthilly keeps consumables in the same register as your equipment, with a per-item SKU, unit price, target stock and reorder point in Purchasing & restock. Purchase orders go out as a PDF or by email to suppliers held in a supplier register, and receiving an order updates stock - and optionally the unit price - while a per-item price history builds up the dated cost layers a FIFO calculation needs. A QR label on each item opens its record in the phone browser, with no app to install, and every change lands in the audit history. Finance can pull a CSV export when it is time to value stock. Restock is part of the Starter plan, and asset valuation and depreciation are in Pro. Start free - no credit card required - or talk to us about your setup.