---
title: "FIFO (first in, first out)"
description: "What FIFO (first in, first out) means, how it values cost of sales and closing inventory, a worked example against weighted average, and when IAS 2 allows it."
canonical: https://ledgeriano.com/glossary/fifo
language: en
publisher: "Ledgeriano"
updated: 2026-11-06
---

# FIFO (first in, first out)

> What FIFO (first in, first out) means, how it values cost of sales and closing inventory, a worked example against weighted average, and when IAS 2 allows it.

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.

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](https://ledgeriano.com/guides/inventory-cost-accounting) 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](https://ledgeriano.com/tools/fifo-vs-weighted-average-calculator).

```
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 |

### Is FIFO better than weighted average?

Neither is better in general. FIFO keeps the balance sheet close to current prices and is easy to explain; weighted average smooths price swings. Choose the one that best reflects how cost flows in your business and stick to it.

### Why is LIFO not allowed under IFRS?

IAS 2 prohibits LIFO because it can leave very old costs on the balance sheet and does not faithfully represent inventory flows. US GAAP still allows it.

Guide: https://ledgeriano.com/guides/inventory-cost-accounting