First In First Out Method (FIFO)


The financial accounting term first-in, first-out refers to one of several approaches to inventory valuation.  The first-in, first-out method assumes the oldest items held in inventory are the first items to be sold when determining the value of inventory appearing on a company's balance sheet.


Also referred to as FIFO, the first-in, first-out method assumes the oldest items held in stock are the first items to be sold.  This is an assumption used to value inventory; the physical flow of items from inventory may differ from this valuation technique.

When the cost of materials is rising, the FIFO method will assign a larger dollar value to ending inventory than under an average cost method.  Since the items remaining in inventory at year end are assigned "recent" cost, this approach is viewed as one of the more "realistic" methods to valuing inventory.

Accurate inventory valuation will ensure the proper reporting of assets on the company's balance sheet.  It's also important to understand the ending inventory value for one year is likewise the beginning inventory value in the following year.  Inventory errors also have an effect on net income.  For example, if the beginning inventory is understated, net income in that period will be overstated.


The following table illustrates the FIFO approach to valuing inventory.  Company A begins the year with 250 units, adds 400 units throughout the year, and sells 500 units.  The ending inventory for Company A is 150 units.

  Units Cost per Unit Total Cost
Beginning Inventory 250 $700 $175,000
Additions on March 1 100 $725 $72,500
Additions on June 1 100 $750 $75,000
Additions on September 1 100 $775 $77,500
Additions on December 1 100 $800 $80,000
Cost of Goods Available for Sale 650   $480,000
Units Sold 500    
Additions on September 1 50 $775 $38,750
Additions on December 1 100 $800 $80,000
Ending Inventory 150   $118,750

The above ending inventory of $118,750 can be used along with the cost of goods available for sale ($480,000) to determine the Cost of Goods Sold:

= Cost of Goods Available for Sale - Ending Inventory
= $480,000 - $118,750, or $361,250

Related Terms

inventory, balance sheet, net income, cost of goods sold, last in, first out, gross profit method, lower of cost or market