First In, First Out (FIFO): Definition, Examples, and How to Apply the Method
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The first in, first out method, better known as FIFO, ships or issues the stock that has been sitting in your warehouse the longest before anything else. Applying FIFO correctly requires you to separate two decisions that are often confused: how the goods physically move, and how their cost is valued in your books.
With a worked first in, first out example and a comparison with LIFO and FEFO, you’ll be able to decide which rule fits each item category in your warehouse.
What Is First In, First Out? Meaning and How FIFO Works
FIFO is the acronym for First In, First Out. The rule is applied item by item, or SKU by SKU: it doesn’t compare a pallet of screws with a pallet of gloves, but the different lots of gloves with one another. Among those lots, FIFO gives priority to the one with the oldest receiving date.
The short definition usually leaves out three nuances of the first in, first out meaning:
- The date that counts is the date the stock arrived in your warehouse, not the manufacturing date. Two lots received on the same day can have very different manufacturing ages, and FIFO doesn’t distinguish between them.
- FIFO sets the order in which stock leaves, not the speed. How often your stock turns over is measured by the inventory turnover ratio, and when to restock is decided by the reorder point. The first in, first out method only answers one question: “Which unit goes out next?”
- FIFO is especially useful when time affects the item, whether through expiration, obsolescence, or deterioration. If two units are identical no matter when you look at them, applying FIFO still keeps the warehouse organized, even though the result barely differs from any other picking rule.
Physical FIFO vs. FIFO Accounting: Two Decisions That Don't Have to Match
Much of the confusion around the term comes from the fact that “FIFO” refers to two different things. One is a way of moving goods; the other is a method for assigning cost to the units that leave your inventory. The first is decided by the warehouse, and the second by accounting.
FIFO In the Warehouse: Which Unit Gets Shipped (FIFO Stock Management)
Physical FIFO is an operational rule. FIFO stock management shows up in how goods are put away, in what order each order is picked, and in how shelves are restocked. Its goal is to prevent a lot from being forgotten at the back of a shelf until it expires or deteriorates. It’s applied by warehouse staff and, where one exists, by the warehouse management system (WMS).
FIFO In Accounting: Which Cost Is Assigned to Each Unit That Leaves
FIFO accounting is a calculation convention. It assumes that the first units purchased are the first units sold or consumed, and it values each outgoing unit at the cost of those older units. To apply the first in, first out method in your books, you need records that let you identify the quantities and costs of each receipt and match them to the units that go out, something a perpetual inventory system makes much easier.
In the United States, most companies prepare their financial statements under U.S. GAAP, where inventory is covered by ASC 330. U.S. GAAP permits several cost flow assumptions, including FIFO, the weighted average cost method, specific identification, and LIFO (last in, first out). Whichever method a company chooses has to be applied consistently from period to period. For tax purposes, the IRS also expects a method that clearly reflects income, and there is one important link between your books and your tax return: a company that uses LIFO for its tax return generally has to use LIFO in its financial statements as well (the so-called LIFO conformity rule).
Many guides cite International Financial Reporting Standards (IFRS) as the reference framework. IFRS is widely used outside the United States and matters to U.S. businesses that report to a foreign parent company or investors, but it isn’t the standard for most privately held U.S. companies. One key difference: IFRS (IAS 2) allows FIFO and weighted average cost but prohibits LIFO entirely. For valuing the inventory of a U.S. warehouse, U.S. GAAP and IRS rules are therefore the relevant reference.
Practical tip:
Rotating your warehouse stock by FIFO doesn’t force you to value it by FIFO, and vice versa. A company can physically ship its oldest stock first and still value its inventory using the weighted average cost method.
If you’re thinking about switching valuation methods, talk to your CPA or accountant first: a change affects the comparability of your financial statements from one fiscal year to the next, and for tax purposes it usually requires filing IRS Form 3115 (Application for Change in Accounting Method).
First In, First Out Example: Step by Step
An example of FIFO with real numbers shows what each approach does better than any definition. The figures in this first in, first out example are hypothetical: a field service company receives boxes of nitrile gloves of the same SKU in two deliveries and pulls part of that stock at the end of the month.
- March 3: 100 boxes arrive (Lot A) at $4.00 per box.
- March 17: 150 boxes arrive (Lot B) at $4.60 per box.
- March 28: 180 boxes go out to the team’s service vans.
In the warehouse, the stock clerk first pulls all 100 boxes from Lot A and completes the order with 80 boxes from Lot B. That leaves 70 boxes on the shelf, all from Lot B.
In FIFO accounting, the result depends on the valuation method. Here’s how the cost of goods issued is calculated under each method:
FIFO cost of the 180 boxes issued:
100 × $4.00 + 80 × $4.60 = $400.00 + $368.00 = $768.00
Weighted average cost per box (recalculated after each receipt):
($400.00 + $690.00) ÷ 250 boxes = $1,090.00 ÷ 250 = $4.36
Weighted average cost of the 180 boxes issued:
180 × $4.36 = $784.80
Hypothetical Example: cost of issuing 180 boxes by valuation method
| Item | FIFO | Weighted average cost (recalculated after receipts) |
|---|---|---|
| Calculation of the cost of goods issued | 100 × $4.00 + 80 × $4.60 | 180 × $4.36 ($1,090.00 ÷ 250 boxes) |
| Cost of goods issued | $768.00 | $784.80 |
| Value of the 70 remaining boxes | $322.00 | $305.20 |
| Total (goods issued + ending inventory) | $1,090.00 | $1,090.00 |
The total doesn’t change: what changes is how it’s split between the cost for the period and the value of the stock that remains. When prices are rising, as in this case, FIFO assigns a lower cost to the units that go out and leaves your ending inventory valued at the most recent prices. When prices are falling, the opposite happens.
FIFO vs. LIFO (and FEFO): What Changes With Each Method
FIFO, LIFO, and FEFO are rules for deciding which unit leaves first. The table compares them as physical warehouse rules.
Comparison of FIFO, LIFO, and FEFO as physical picking rules
| Rule | What goes out first | Best suited for | Risk if applied incorrectly |
|---|---|---|---|
| FIFO | What came in first | Items that age or become obsolete but have no reliable expiration date per lot | A lot received later but with an earlier expiration date can expire on the shelf |
| LIFO | What came in last | Materials that don't age and are stored in structures that favor pulling the most recently placed units | Units at the back can sit untouched for a very long time |
| FEFO | What expires first | Food, pharmaceuticals, chemicals, and any item with a date per lot | Requires recording the expiration date of each lot; without that data, it can't be applied |
LIFO: An Exception on the Warehouse Floor, a Tax Decision in the Books
As a physical rule, LIFO only makes sense in certain warehouse setups (see table). As a valuation method, the U.S. is a special case: unlike under IFRS, LIFO is permitted under U.S. GAAP and for tax purposes. When prices rise, LIFO assigns the newest, higher costs to the units that go out, which raises the cost of goods sold and lowers taxable income. That’s why some U.S. companies value inventory by LIFO even though their warehouse physically follows FIFO. Because of the LIFO conformity rule and the extra recordkeeping involved, it’s a decision to make with your CPA, not with your warehouse team.
FEFO: When the Expiration Date Takes Priority
FEFO (first expired, first out) sets priorities by expiration date instead of receiving date: it’s a rule for physical stock movement, not an inventory valuation method.
How to Implement FIFO Inventory Management in Your Warehouse
FIFO inventory management isn’t implemented with a written policy. It’s implemented through decisions about storage locations, recordkeeping, and checks that your team can follow without having to think about it.
Step 1: Store Stock So the Oldest Units Are Within Reach
Flow racks, also called gravity flow or carton flow racks, separate loading and unloading on opposite sides, so new stock pushes older stock toward the picking face. In small warehouses, it’s enough to always restock from the back or from the top. If you work with random storage locations (dynamic or chaotic storage), FIFO order no longer depends on the shelf; it depends on your system recording where each lot is and letting you locate the oldest one for picking.
Step 2: Record the Receiving Date and Lot Number
Every lot needs visible identification with its receiving date and, if applicable, its expiration date. Without that information, whoever picks an order can’t tell which box is the oldest. Lot traceability also covers another need: finding out which units from a specific lot are still in the warehouse if they have to be pulled, for example during a recall.
Step 3: Check That FIFO Is Being Followed
Cycle counts also let you check whether the oldest lot is still in the front position. Two inventory KPIs can help you spot problems in your FIFO stock management: shrinkage due to expiration or damage, and stock with no movement over several months.
Practical tip:
FIFO usually breaks down during restocking, not during order picking. If whoever restocks puts new goods in front because it’s faster, the old lot ends up in the back, even if the person picking orders always takes from the front. When you can’t load from the back, write the receiving date in large print and check during every count that the oldest lot is in the front position.
FIFO Stock Management for Operating Supplies: PPE, Consumables, and Spare Parts
Guides on FIFO usually have goods for resale in mind, but the rule matters just as much for the materials a company consumes itself: gloves and other personal protective equipment (PPE), batteries, filters, adhesives, or sealants. Some of these items may carry an expiration date, while others simply deteriorate if they spend too long in a drawer.
Here the challenge isn’t the shelf, it’s dispersion. When every van or job site keeps its own small stock, FIFO order in the central warehouse no longer protects what’s out in the field. A simple rule helps: material returned from a job site is recorded with its original receiving date and placed according to the age order of the rest of the stock, instead of assuming that a return is automatically older than material that was just received. Our inventory optimization guide explains how to bring that dispersed stock into your records.
How Timly Makes FIFO Inventory Management Easier
Timly is cloud-based inventory management software built for equipment, tools, consumables, and warehouse stock. To keep FIFO order in place, it provides the records the rule depends on:
- QR code labels on items and storage locations: when you scan an outgoing item with your phone, the movement is recorded in the system.
- Custom fields per category to record the receiving date, lot number, or expiration date of each item, the core data of FIFO inventory management.
- Movement history per SKU, useful for checking whether your FIFO stock management works and lots are leaving in the intended order.
- Minimum quantities per location, with an alert when they’re reached.
- A single view across warehouses, vehicles, and job sites, useful for locating material that’s outside the central warehouse.
FIFO accounting, or valuation by weighted average cost, continues to be handled in your ERP or accounting software. Timly doesn’t replace those systems, but it can connect to them via API.
Conclusion: Which First In, First Out Rule to Apply to Each Item Category
If you manage stock that ages, FIFO affects you even if you don’t call it that. The useful question isn’t which method is better in the abstract. It’s what each item category loses if it stays on the shelf longer than it should, whether that’s its expiration date, its useful life, or its value. That answer determines the physical rule; FIFO accounting or any other valuation method is decided separately, together with your CPA.
The first step takes ten minutes: pick a shelf with time-sensitive stock and check whether the oldest lot is in front. If it isn’t, the problem lies in how the shelf is restocked, and that’s where you should act first. With Timly, you can record receiving dates and lot numbers on every item and see at a glance whether your FIFO inventory management is working across the warehouse, your vans, and your job sites.
FAQs About First In, First Out
First in, first out (FIFO) means that the units that entered your inventory first are the first ones to leave it, whether they're shipped, sold, or consumed. The term is used both for physical stock rotation in the warehouse and for a cost assumption in FIFO accounting.
It's worth confirming which meaning applies when the acronym shows up in a procedure or in a contract with a third-party logistics (3PL) provider. Some people also use "FIFO" loosely when they actually mean "first expired, first out," which is FEFO.
Yes. FIFO can be applied manually by marking the receiving date on each lot and organizing the shelf so the oldest stock is easy to reach. A digital system isn't essential, but it makes FIFO inventory management much easier to control as the number of SKUs or storage locations grows.
FIFO and the weighted average cost method are both inventory valuation methods, not physical picking rules.
FIFO values each outgoing unit at the cost of the oldest units; the weighted average cost method recalculates an average cost after each receipt and applies it equally to all units that go out. U.S. GAAP allows both, as well as LIFO and specific identification.
No. No law requires you to use FIFO in your warehouse: it's a recommended practice for managing stock that loses value over time, not a regulatory requirement. Industry rules can come close, though; food and pharmaceutical businesses, for example, often have to show they control expiration dates, which in practice means FEFO.
The only indirect legal reference is on the accounting side: U.S. GAAP and IRS rules govern which valuation methods you can use and require you to apply them consistently, not how goods must physically move.
A simple example of FIFO: you receive 100 boxes of gloves on March 3 and 150 boxes on March 17. When 180 boxes go out on March 28, the first 100 come from the March 3 delivery and the remaining 80 from the March 17 delivery. In FIFO accounting, those 180 boxes are valued at the March 3 price first and the March 17 price for the rest.
