FIFO (first in, first out).

In plain English

FIFO, first in first out, is a cost-flow assumption: when a sale happens, the company charges cost of goods sold using the price it paid for its earliest remaining inventory. It is an accounting convention about which costs move, not a claim about which physical boxes left the shelf. When input prices are rising, FIFO charges older cheaper costs to COGS, which raises reported gross profit and leaves higher, more current values in ending inventory. In those same conditions it also raises taxable income compared with LIFO. FIFO is permitted under both U.S. GAAP and IFRS, which is one reason global companies favor it.

01Why it matters

During a stretch of rising costs, a FIFO company can report growing profit while its real replacement costs are climbing just as fast, so the margin looks better than the business feels.

02The math, step by step

Say a shop buys 100 units at 10 dollars, then 100 units at 14 dollars, and sells 120 units. FIFO charges 100 units at 10 dollars plus 20 units at 14 dollars, so COGS is 1,280 dollars. The 80 units left are valued at 14 dollars each, or 1,120 dollars.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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