F

FIFO

What is FIFO?

FIFO, short for First-In, First-Out, is an inventory valuation and management method used in accounting and logistics. Under this method, the oldest inventory items (those purchased or produced first) are recorded as sold or used first. The remaining inventory consists of the most recently acquired goods.

FIFO is widely used in inventory management and financial reporting, especially in industries dealing with perishable goods, electronics, or items subject to obsolescence.

How FIFO Works

In practice, FIFO assumes that the goods acquired or manufactured first are sold before the newer stock. This principle mirrors the natural flow of many goods—for example, in supermarkets, older milk cartons are sold before newer ones to reduce spoilage.

In accounting terms, when calculating the cost of goods sold (COGS), the cost associated with the oldest inventory is used first. The remaining inventory on the balance sheet reflects the most recent purchase costs.

FIFO in Accounting

FIFO plays a key role in determining profits, taxes, and inventory valuation. Here’s how it affects financial reporting:
• In times of rising prices, FIFO results in lower COGS and higher profits, since cheaper, older inventory is recorded as sold first.
• In times of falling prices, it may lead to higher COGS and reduced profits.

This method can influence a company’s tax liabilities, as higher profits may mean higher taxable income. For this reason, some companies may choose other methods depending on their financial strategies and regulatory environment.

FIFO vs LIFO

While FIFO stands for First-In, First-Out, another common method is LIFO (Last-In, First-Out), where the most recently acquired inventory is considered sold first. FIFO generally gives a more accurate picture of inventory value, especially when prices are stable or increasing. However, LIFO is not allowed under some accounting standards (like IFRS), while FIFO is universally accepted.

FIFO in Workforce Scheduling

In some contexts, FIFO is also used to describe a labour deployment model— particularly in industries like oil, mining, or construction—where employees are flown to remote job sites for a set period (First-In) and then rotated out (First-Out). This use of FIFO differs from the accounting method but shares the same fundamental idea of orderly sequencing.

Advantages of FIFO

• Simple and logical inventory flow
• Better reflects the physical movement of goods
• Provides higher inventory value on the balance sheet in inflationary periods
• Universally accepted in financial reporting

Final Thoughts

FIFO is not just an accounting formula—it’s a practical and efficient method for managing stock and ensuring accurate financial records. Whether applied to inventory systems or remote workforce models, FIFO supports structured decision-making, reduced waste, and improved transparency across business operations.