Inventory

FIFO inventory method explained (and FIFO vs LIFO)

FIFO (first in, first out) is an inventory method that treats the oldest stock as sold first. In accounting, it means the costs of your earliest purchases go into cost of goods sold first, and your newest costs stay in inventory. In the warehouse, it means shipping your oldest units before newer ones.

FIFO as valuation vs FIFO as stock rotation

The term means two different things:

	FIFO for valuation (accounting)	FIFO for stock rotation (warehouse)
What it decides	Which purchase costs go into COGS	Which physical units get picked
Why it matters	Profit, margins and inventory value on the balance sheet	Freshness, expiry and avoiding old stock piling up
Applies to	Every business that holds stock	Especially perishable, dated or seasonal products

They're independent: you can value inventory with FIFO and pick in any order, or vice versa. Most stores benefit from both.

Worked example with cost layers

Each purchase at a different cost creates a cost layer.

Worked example: three purchases, 150 units soldExample numbers

Purchase	Units	Cost per unit	Layer cost
January	100	$10	$1,000
February	100	$12	$1,200
March	100	$14	$1,400
Total available	300		$3,600

150 units are sold. Under FIFO, the oldest layers are used first:

All 100 January units: 100 × $10 = $1,000
50 of the February units: 50 × $12 = $600
COGS = $1,600
Ending inventory = 50 × $12 + 100 × $14 = $2,000

COGS plus ending inventory always equals the $3,600 available.

FIFO vs LIFO vs weighted average cost

The same 150 units sold, valued three ways:

Method	How it works	COGS	Ending inventory
FIFO	Oldest costs sold first	$1,600	$2,000
LIFO	Newest costs sold first: 100 × $14 + 50 × $12	$2,000	$1,600
Weighted average	Every unit at the average: $3,600 ÷ 300 = $12.00	$1,800	$1,800

Weighted average cost

Weighted average cost = Total cost of goods available ÷ Total units available

With rising costs, as here:

FIFO gives the lowest COGS and highest profit, and values remaining inventory closest to current replacement cost.
LIFO gives the highest COGS and lowest profit, which can mean lower taxable income.
Weighted average sits in between and smooths out price swings.

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Which method should an online store use?

FIFO is the most common choice for small online stores. It's intuitive, matches how most stock physically moves, and is accepted almost everywhere.
Weighted average suits stores with many purchases of identical items at slightly different prices. Many inventory and accounting tools use it by default.
LIFO is rarely used by small ecommerce businesses, and isn't an option for businesses reporting under IFRS.

Whichever you choose, use it consistently. Your method affects COGS, so it affects gross margin and inventory turnover.

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Physical FIFO: rotating stock

For the warehouse side of FIFO:

Label each delivery with its received date.
Put new stock behind or below old stock, so pickers reach the oldest first.
Check dated products during stocktakes, and flag anything near expiry. See how to run a stocktake.
Watch for old stock building up. It's an early sign of dead stock.

For how valuation feeds into the cost of what you sold, see how to calculate COGS.

FAQ

What does FIFO mean?

First in, first out. In accounting, it means the oldest stock costs are counted as sold first. In the warehouse, it means shipping the oldest units first.

Is LIFO allowed?

LIFO is allowed under US GAAP but not permitted under IFRS, the international accounting standards. Most small online stores use FIFO or weighted average cost. Ask your accountant which fits your situation.

Which method gives higher profit?

When purchase costs are rising, FIFO gives the lowest COGS and the highest reported profit, because the cheaper, older costs are expensed first. LIFO gives the opposite. Over the long run, total COGS is the same; only the timing differs.

Can I switch inventory methods?

Changing valuation methods usually has accounting and tax consequences, so don't switch without advice. Pick one method and use it consistently.

Do I have to rotate stock physically if I use FIFO accounting?

No, the accounting method and the physical flow are separate. But physically rotating stock first-in, first-out is good practice for anything that ages, expires or goes out of style.