FIFO is an inventory cost-flow assumption that assigns the oldest costs to cost of goods sold and leaves newer costs in ending inventory.
FIFO, short for first in, first out, is an inventory accounting method that assumes the earliest acquired or produced units are the first ones recognized in cost of goods sold.
Under FIFO, ending inventory is made up of the most recent costs still on hand. In rising-price environments, that often produces a lower cost of goods sold and a higher ending inventory balance than methods that expense newer costs first.
FIFO affects several reported numbers at the same time:
Because those figures feed directly into the income statement and balance sheet, the chosen cost-flow assumption changes how profitable and asset-rich the business appears.
LIFO assumes the latest costs are recognized first. AVCO smooths costs by averaging them. Specific Identification traces the actual cost of specific units.
FIFO is often easiest to understand because it usually mirrors the physical flow of perishable or time-sensitive inventory, even though accounting flow and physical flow do not need to match.