What is FIFO (first in, first out)?

FIFO does two jobs, and it is worth keeping them apart.

As a physical discipline, it means the oldest stock leaves first. For a grocer, a pharmacy or any trade with dated goods, this is how you avoid writing stock off as a loss. In practice the shelf has to be filled from the back, and the system has to pick the earliest batch when a sale is made.

As a valuation basis, FIFO assumes the units still on hand are the ones you bought most recently. Your closing stock is therefore valued at recent prices. Your reported cost of goods sold, which is the cost of what you sold, uses the older prices, and these are usually lower.

The alternative basis is weighted average cost. It averages out price changes instead of tracking each delivery. Either basis is acceptable, as long as you use it consistently.

See how Kuver Books handles it All terms