What Is FIFO (First In, First Out) in Inventory?
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Talk to our experts- FIFO
- FIFO (first in, first out) is an inventory costing method that assumes the items a business bought or produced first are the first ones sold, so cost of goods sold carries the oldest costs and ending inventory carries the most recent ones. Applied physically, the same order means shipping or using the oldest stock first.
Also called: first in, first out, FIFO method
How it works
FIFO is the inventory method the IRS describes as assuming the items you purchased or produced first are the first items you sold, consumed, or otherwise disposed of. The items left in inventory at the end of the tax year are matched with the costs of similar items you most recently purchased or produced.
IRS Publication 538 lists three ways to identify the cost of items in inventory: specific identification, FIFO and LIFO. It says to use FIFO or LIFO when you cannot specifically identify items with their costs, or when the same type of goods are intermingled in your inventory and cannot be identified with specific invoices.
The same order can also be applied physically, as a rotation rule. For finished drug products, FDA's current good manufacturing practice rules require written distribution procedures that include a procedure whereby the oldest approved stock of a drug product is distributed first. Approved components must be rotated so that the oldest approved stock is used first. In both cases, a deviation is permitted if it is temporary and appropriate.
FIFO vs LIFO
LIFO (last in, first out) is the reverse assumption: the items you purchased or produced last are the first items you sold, consumed, or otherwise disposed of. The IRS says each method produces different income results, depending on the trend of price levels at the time.
- When prices rise: LIFO produces a larger cost of goods sold and a lower closing inventory. Under FIFO, cost of goods sold is lower and closing inventory is higher.
- When prices fall: the opposite holds.
- Adopting LIFO: you file Form 970, Application To Use LIFO Inventory Method, or a statement with the information Form 970 requires, with your timely filed tax return for the first year you use LIFO. The IRS calls the LIFO rules very complex.
- Changing methods: to change your method of accounting for inventory, you file Form 3115.
As of October 28, 2026, these points come from IRS Publication 538 (revised January 2022). This is general information, not tax or accounting advice.
Example
A distributor starts the quarter with no stock of one valve. First, it buys two lots:
- Lot 1: 100 valves at $10 = $1,000
- Lot 2: 100 valves at $12 = $1,200
It sells 150 valves during the quarter.
- FIFO: cost of goods sold = 100 x $10 + 50 x $12 = $1,600. Ending inventory = 50 x $12 = $600.
- LIFO: cost of goods sold = 100 x $12 + 50 x $10 = $1,700. Ending inventory = 50 x $10 = $500.
The price rose between the lots, so FIFO shows the lower cost of goods sold and the higher ending inventory. On the warehouse floor, FIFO rotation means picking Lot 1 first.
On Shopify
Shopify's inventory value reporting uses the cost per item you enter on each product or variant. The Month-end inventory value report totals on hand inventory for products with a cost per item value assigned at the time of sale: for each variant, it multiplies the cost per item by the ending quantity and shows the sum in a Summary row.
Profit reports depend on it too: profit is reported only for products and variants that had cost recorded at the time they were sold.
Shopify notes that the Cost per item field contains static data, so profit report data is only relevant to a specific point in time. For dynamic reporting, one option it lists is running your financial reports in another business system, such as an ERP or accounting system.
How Uncap helps
Uncap's food service distribution page describes lot and expiry carried through the order: captured at fulfillment, written against the order line, and queryable by lot across customers and shipments. Date code acceptance rules enforce minimum remaining shelf life per account, so product is not sold into a rejection.
Sources
Frequently asked questions
What does the FIFO method of inventory valuation mean?
The FIFO (first in, first out) method assumes the items you purchased or produced first are the first items you sold. Per IRS Publication 538, the items left in inventory at year end are matched with the costs of the items you most recently purchased or produced.
What's the difference between FIFO and LIFO?
FIFO assumes the oldest items are sold first, and LIFO (last in, first out) assumes the newest items are sold first. When prices are rising, LIFO produces a larger cost of goods sold and a lower closing inventory, while FIFO produces a lower cost of goods sold and a higher closing inventory. When prices fall, the opposite holds.
Does the IRS require FIFO or LIFO?
No single method is required. IRS Publication 538 lists specific identification, FIFO and LIFO, and says to use FIFO or LIFO when items cannot be matched to specific invoices. Adopting LIFO takes Form 970, and changing an inventory method takes Form 3115. This is general information, not tax advice.
What is the FIFO definition?
FIFO stands for first in, first out. As a costing method, it assumes the first items bought or produced are the first sold. As a rotation rule, it means the oldest stock goes out first, as FDA's drug manufacturing rules require for approved drug products.
