Definition
FIFO, first in first out, is an inventory costing method that assumes the oldest units in stock are sold or used first. Cost of goods sold is therefore measured at the earliest purchase prices still on hand, and closing inventory at the most recent prices. IAS 2 and US GAAP both permit FIFO for interchangeable items.
How it works
Under FIFO each receipt forms a cost layer. When goods leave, the system consumes the oldest layer first and moves to the next only when it is used up. The physical flow does not have to match; FIFO is a cost assumption.
When prices rise, FIFO reports a lower cost of sales and higher profit than weighted average, and the balance sheet shows inventory close to current replacement cost. When prices fall, the effect reverses. Pick one method per class of similar items and apply it consistently, because switching changes reported profit.
In Ledgeriano each item can use FIFO, moving weighted average or standard cost, and every stock movement posts a balanced journal entry. Compare the methods on your own numbers with the FIFO vs weighted average calculator.
Formula
COGS = Σ (units issued from each layer × that layer's unit cost), oldest layer first
Closing inventory = Opening + Purchases - COGS
Example: two purchases and one sale
A shop buys 100 units at 10 and then 200 units at 12, and sells 150 units. FIFO takes the 100 older units at 10 and 50 of the newer units at 12.
| FIFO | Weighted average | |
|---|---|---|
| Cost of goods sold (150 units) | 100 × 10 + 50 × 12 = 1,600 | 150 × 11.33 = 1,700 |
| Closing inventory (150 units) | 150 × 12 = 1,800 | 150 × 11.33 = 1,700 |
| Total cost accounted for | 3,400 | 3,400 |