First in, first out (FIFO)
FIFO assumes the oldest stock is sold first, both for valuing inventory and for physically rotating goods on the shelf.
First in, first out, or FIFO, means the goods you bought first are treated as the goods you sell first. It has two uses. On the shelf, it means putting new stock behind old stock so nothing expires. In accounts, it is a method for working out the cost of what you sold when you bought the same item at different prices.
Example
A grocery wholesaler buys 20 tins of ghee at Rs 2,600 each, then a week later another 20 tins at Rs 2,800 each. He then sells 25 tins.
| Tins | Cost per tin | Total | |
|---|---|---|---|
| From first lot | 20 | Rs 2,600 | Rs 52,000 |
| From second lot | 5 | Rs 2,800 | Rs 14,000 |
| Cost of 25 tins sold | 25 | Rs 66,000 | |
| Stock left (second lot) | 15 | Rs 2,800 | Rs 42,000 |
Under FIFO, the cost of the 25 tins sold is Rs 66,000, and the 15 tins left are valued at the latest price, Rs 42,000 in total.
Why it matters
When prices are rising, FIFO gives a lower cost of goods sold and a higher closing stock value than weighted average cost. For food, medicine and anything with an expiry date, physical FIFO is essential whatever method the accounts use.
How software handles it
Inventory software records each purchase with its price and works out cost automatically, so nobody has to track lots by hand. Our guide on FIFO vs average cost compares the two methods with more examples.
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