The Comprehensive Guide to

Passive Income Investing


Learn the secrets of how Paul Tracy generates over $XXX,XXX per month in passive income!

How to Become Financially Independent Through Passive Income Investing

What Is FIFO?

First in, first out (FIFO) is an accounting method for inventory valuation. It assumes that goods are sold and/or used in the same chronological order in which they are acquired.

In simpler words, the FIFO method assumes that merchandise purchased first is sold first.

Understanding the First in, First out Method

FIFO values all inventory according to the cost of the earliest-purchased merchandise within a given accounting period. FIFO does not recognize the disparity between the costs of earlier- (or later-) purchased merchandise. As a result, revenues from sold merchandise are measured against the cost of the earliest-purchased merchandise – regardless of any differences in the cost of the merchandise or of the goods themselves.

FIFO Example

Suppose that at the beginning of a given period, Store XYZ buys 10 coffee mugs at a cost of one dollar each. A week later, the store also buys picture frames for $5 each.

At the end of the period, the store has sold 10 total items (a combination of coffee mugs and picture frames) for $100 in revenue. Although not all of the 10 items sold were coffee mugs, the revenue that the store received from sales will only be measured against the cost of the 10 coffee mugs ($10). That’s because, as inventory, they were acquired first.

Why Is FIFO Important?

Because inventory can make up a substantial portion of a company's assets (and is an important component of the balance sheet), it is crucial for investors to take the time to understand how inventory is valued.

Though there are tax advantages to using FIFO in the case of higher first-in inventory costs, FIFO can result in higher taxes in the event of inflation (especially when combined with the sale of more recently-purchased items).

Ask an Expert about First In, First Out (FIFO)

All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about First In, First Out (FIFO).

Be the first to ask a question

If you have a question about First In, First Out (FIFO), then please ask Paul.

Ask a question
Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.