FIFO inventory method
FIFO inventory method assumes the oldest units purchased are sold first, so cost of goods sold reflects earlier purchase costs and closing inventory is valued at the most recent prices.
Also known asfirst-in first-out
FrameworkFirst-in, first-out (FIFO)
See it move
The flow diagram shows two batches entering inventory in date order: 100 units purchased in January at €10 each, followed by 200 units purchased in February at €12 each. When 120 units are sold under the FIFO rule, the oldest 100 January units leave first (€10 each), followed by 20 February units (€12 each), producing a cost of goods sold of €1,240; the remaining 80 units stay on hand at the newer €12 cost, giving closing inventory of €960.
The formula
Variables
- Beginning inventory balance (€)
- Cost of inventory purchased during the period (€)
- Ending inventory; valued at the most recent purchase prices under FIFO (€)
General inventory cost-flow identity; FIFO determines that EI carries the latest costs, leaving older costs in COGS
If you trained under a national GAAP
DE · HGBWhere national-GAAP intuition diverges from the international standard
HGB (German)
The German Commercial Code (HGB) has historically permitted the last-in first-out (LIFO) method as a legitimate cost-flow assumption alongside FIFO and weighted-average cost. Where a company applies LIFO, its closing inventory carries old, often lower, purchase prices, reducing the balance sheet value of stock and deferring the recognition of holding gains relative to FIFO.
IFRS
International standards prohibit the LIFO method entirely; only FIFO and the weighted-average cost formula are permitted for measuring inventory cost. A company transitioning from HGB-LIFO to IFRS must restate its inventory balance to a FIFO or weighted-average basis, typically increasing the carrying amount and adjusting opening retained earnings accordingly.