{"id":1128,"date":"2024-07-08T15:52:31","date_gmt":"2024-07-08T15:52:31","guid":{"rendered":"https:\/\/www.shipbob.com\/uk\/blog\/fifo\/"},"modified":"2025-07-15T21:15:43","modified_gmt":"2025-07-15T21:15:43","slug":"fifo","status":"publish","type":"blog","link":"https:\/\/www.shipbob.com\/uk\/blog\/fifo\/","title":{"rendered":"What is the FIFO Method and How Can it Be Used?"},"content":{"rendered":"\n

Table of Contents<\/p>

** Minutes<\/p><\/div><\/div>\n

What is the FIFO method?<\/a><\/p>\n\n\n\n

FIFO formula & calculation example<\/a><\/p>\n\n\n\n

FIFO method: Pros vs. Cons<\/a><\/p>\n\n\n\n

What\u2019s the difference between FIFO and LIFO?<\/a><\/p>\n\n\n\n

Which method of inventory management should you use?<\/a><\/p>\n\n\n\n

Leave inventory management to the pros (ShipBob)<\/a><\/p>\n\n\n\n

FIFO FAQs<\/a><\/a><\/p>\n<\/div>\n\n\n\n

When Susan first opened her pet supply store, she quickly discovered her vegan pumpkin dog treats were a huge hit and brought in favorable revenue. But when it was time to replenish inventory<\/a>, her supplier had already increased their prices.<\/p>\n\n\n\n

Though some products are more vulnerable to fluctuating price changes, dealing with inflation when restocking inventory<\/a> is inevitable. <\/span><\/p>\n\n\n\n

But no matter what you sell, keeping track of inventory value over time is essential. So how <\/span>should a brand keep track of fluctuating inventory value over time?<\/p>\n\n\n\n

To ensure accurate inventory records<\/a>, one of the most common inventory valuation methods is FIFO (first-in, first-out), which assumes the oldest inventory items were sold first and the value is calculated accordingly.<\/p>\n\n\n\n

Read on for a deeper dive on how FIFO works, how to calculate it, some examples, and additional information on how to choose the right inventory valuation strategy for your business.<\/span><\/p>\n\n\n\n

What is the FIFO method?<\/h2><\/div>
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FIFO stands for \u201cfirst in, first out\u201d, which is an inventory valuation method<\/a> that assumes that a business always sells the first goods they purchased or produced first. This means that the business\u2019s oldest inventory gets shipped out to customers before newer inventory.  <\/span><\/p>\n\n\n

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To calculate the value of ending inventory, a brand uses the<\/span> cost of goods sold (COGS)<\/a> of the oldest inventory, despite any recent changes in costs.<\/span><\/p>\n\n\n\n

How the FIFO inventory valuation method works<\/h3>\n\n\n\n

Since ecommerce inventory<\/a> is considered an asset and impacts your balance sheet, you are responsible for calculating COGS at the end of the accounting period or fiscal year, your COGS for the year tends to be smaller.<\/span><\/p>\n\n\n\n

Due to inflation over time, inventory acquired more recently typically costs more than older inventory. With the FIFO method, since the older goods of lower value are sold first, the <\/span>ending inventory<\/span><\/a> tends to be worth a greater value. <\/span><\/p>\n\n\n\n

Additionally, a<\/span>ny inventory left over at the end of the financial year does not affect cost of goods sold (COGS).<\/p>\n\n\n\n

It\u2019s important to note that the FIFO method is designed for inventory accounting<\/a> purposes. In many cases, the inventory that\u2019s received first isn\u2019t always necessarily sold and fulfilled first. <\/p>\n\n\n\n

However, if you sell items that have a short shelf-life, are perishable, or tend to go obsolete quickly, relying on the FIFO method in practice as well as on paper makes it easy to both keep inventory from spoiling and keep your inventory records in order.  <\/p>\n\n\n\n

Though it\u2019s one of the easiest and most common valuation methods, FIFO can have downsides. For example, FIFO can cause major accounting discrepancies when COGS increases significantly. If accountants use a COGS calculation from months or years back, but the acquisition cost of that inventory has tripled in the time since, profits will take a hit. It also does not offer any tax advantages unless prices are falling. <\/p>\n\n\n

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FIFO formula & calculation example<\/h2><\/div>
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FIFO is not a metric that one calculates. Rather, it is an approach to calculating crucial balance sheet items like COGS.  <\/p>\n\n\n\n

Let\u2019s walk through how one calculates this metric using the FIFO method.  <\/p>\n\n\n\n

FIFO formula <\/h3>\n\n\n\n

The formula for COGS does not change, whether you use the FIFO accounting method or a different one (such as LIFO). The formula for COGS is:  <\/p>\n\n\n\n

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COGS = Starting Inventory + Purchases \u2212 Ending Inventory <\/p>\n<\/blockquote>\n\n\n\n

Likewise, the formula for ending inventory does not change, no matter which accounting method you are using. The formula for ending inventory is: <\/p>\n\n\n\n

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Ending Inventory = Starting Inventory + Purchases \u2212 COGS <\/p>\n<\/blockquote>\n\n\n\n

How to calculate FIFO <\/h3>\n\n\n\n

The key to calculating metrics like COGS and ending inventory under the FIFO method is to assume that you sell all <\/em>the units of inventory you acquired first before you sell any <\/em>units of the inventory you acquired later.  <\/p>\n\n\n\n

For example, say your brand acquired your first 20 units of inventory for $4 apiece, totaling $80. Later on, you purchase another 80 units \u2013 but by then, the price per unit has risen to $6, so you pay $480 to acquire the second batch.  <\/p>\n\n\n\n

At the end of the period, you find you\u2019ve sold 50 of the 100 units in your inventory. Using the FIFO method, you assume you sold all 20 of the original 20 units before you touched the second batch of inventory. This would mean you sold: <\/p>\n\n\n\n