FIFO
First In, First Out - an inventory valuation method assuming oldest items are sold first.
Under FIFO, COGS reflects the oldest inventory costs while ending inventory reflects the most recent purchases. During rising prices, FIFO results in lower COGS and higher profits but also higher tax liability. It is permitted under both GAAP and IFRS and is the natural flow for businesses selling perishable goods.
Example
A grocery store buys milk at $2.00/gallon in week one and $2.20 in week two—under FIFO, sales use the $2.00 cost first while remaining inventory is valued at $2.20.
Why It Matters for Your Business
Your inventory valuation method directly affects reported profits and taxes, and FIFO gives a more current balance sheet valuation important for lending decisions.
Practical Tips
- •Use FIFO for perishable inventory to align accounting with actual product flow.
- •Be aware that FIFO may increase your tax bill during inflationary periods due to lower COGS.
Related Terms
More Accounting Terms
Accounts Payable
Money owed by a business to its suppliers or creditors for goods or services received but not yet paid for.
Accounts Receivable
Money owed to a business by its customers for goods or services delivered but not yet paid for.
Accrual Accounting
An accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged.
Asset
Any resource owned by a business that has economic value and can provide future benefits.
Balance Sheet
A financial statement showing assets, liabilities, and equity at a specific point in time.
Related Financial Guides & Resources
Automate Your Finances with AI
FiscalInsights uses AI to automate bookkeeping, track expenses, and forecast cash flow — so you can focus on your business.
Start Free Trial