The inventory valuation method that assumes the oldest items are sold first is FIFO, meaning “first in, first out.”
Under FIFO, the cost of inventory purchased earliest is assigned to cost of goods sold first. The remaining inventory on the balance sheet is therefore valued using the costs of more recent purchases. This accounting assumption often resembles the physical flow of goods, especially for products that can expire or become obsolete, although the accounting order does not prove that the exact oldest physical item was sold.
For example, if a business buys 100 units at $50 and then 125 units at $55, selling 210 units under FIFO assigns the first 100 units and 110 of the second batch to cost of goods sold. The remaining 15 units use the $55 cost.
FIFO differs from LIFO, which assigns the newest costs first, and from weighted average, which blends costs. During rising prices, FIFO generally produces lower cost of goods sold, higher ending inventory, and higher reported gross profit than LIFO. IFRS prohibits LIFO, while US GAAP permits it.