The inventory costing method that assumes the first items purchased are the first ones sold is FIFO, or “first in, first out.”
FIFO assigns the cost of the oldest inventory units to cost of goods sold first. The remaining inventory is valued using the costs of more recent purchases. This cost-flow assumption is separate from the physical movement of goods: a business may sell items in another sequence while still using FIFO for accounting.
When purchase costs rise, FIFO generally reports lower cost of goods sold and higher ending inventory than LIFO, which can increase reported profit before taxes. That comparison is a common source of confusion. Specific identification tracks the actual cost of particular units, while average cost blends unit costs together.
FIFO is especially intuitive for perishable goods, because selling older stock first can reduce spoilage. In the United States, companies may use FIFO, whereas LIFO is permitted for tax and financial reporting under U.S. generally accepted accounting principles but is not allowed under International Financial Reporting Standards.