What does FIFO stand for in inventory costing?

FIFO stands for “First In, First Out” in inventory costing.

Under FIFO, the costs assigned to inventory acquired earliest are treated as the costs of goods sold first. The remaining inventory on the balance sheet therefore consists of costs from more recent purchases. This cost-flow assumption is especially intuitive for businesses selling goods that can spoil, become obsolete, or need to be rotated by age.

FIFO describes accounting treatment, not necessarily the physical movement of every item. A warehouse may use FIFO or another stock-rotation policy physically, while its financial records apply a separate costing method. The method is also different from specific identification, which tracks the actual cost of individually identifiable items.

Price trends affect FIFO’s reported results. When purchase prices rise, FIFO generally produces lower cost of goods sold, higher ending inventory, and higher gross profit than LIFO. LIFO means “Last In, First Out” and assigns the newest costs to sales first. IFRS permits FIFO but prohibits LIFO, while U.S. GAAP permits qualifying companies to use either method. Weighted-average costing blends purchase costs instead of assigning the earliest costs first.