First-In, First-Out (FIFO) is an inventory management and accounting method where the oldest inventory items (the first ones purchased or produced) are sold first before newer stock.
Companies use the FIFO method because it provides operational and financial benefits, especially for businesses that handle perishable goods like food or products affected by changing costs over time.
It ensures that older stock is used or sold before it expires or becomes obsolete, reducing waste. Moreover, it maintains product quality, which is especially important for food, pharmaceutical products, and consumer goods where shelf life matters. When product prices rise over time, FIFO also provides more accurate profit reporting, resulting in a lower Cost of Goods Sold (COGS) and higher reported profits, as well as a realistic inventory value. FIFO is an accepted method for most accounting standards, including IFRS and GAAP.
Modern inventory systems make it easier to apply FIFO consistently and accurately. With automated cost tracking, systems can automatically record the cost of each batch of purchases and match outgoing stock to the correct purchase date. This ensures COGS and remaining inventory values are calculated correctly without room for manual calculation errors and guesswork.
Additionally, having a system that enforces FIFO can help ensure that warehouse staff and fulfillment dispatch older stock first, preventing spoilage, reducing holding costs, and supports compliance with quality standards. It can also provide real-time visibility for managers to make purchasing decisions and stock control.
