FIFO
/ FY-foh /
Think of how a grocer stocks a milk fridge. New cartons go in at the back, and the oldest cartons are pushed to the front to be grabbed first, so nothing spoils. FIFO — first-in, first-out — borrows that picture for accounting: it assumes the first goods you bought are the first ones you sell.
FIFO is a cost-flow assumption used to decide which cost to attach to the goods you sell. When you sell an item, FIFO assigns it the cost of your oldest unsold purchase. Suppose you bought 10 widgets at 4 each, then later 10 more at 6 each, and you sell 12. Under FIFO the 12 sold are charged at the 10 oldest (at 4) plus 2 of the newer (at 6) = 40 + 12 = 52 of cost of goods sold, leaving 8 widgets at 6 each (48) in ending inventory. Crucially, the newest, costliest goods stay in inventory, so during rising prices FIFO reports higher ending inventory and lower cost of goods sold — and therefore higher profit.
FIFO matters because it usually mirrors how goods physically move (you really do sell the oldest stock first, especially perishables), and it leaves the balance-sheet inventory valued at recent, realistic costs. The catch is the flip side: during inflation FIFO can make profit look larger partly because old, cheap costs are being matched against today's higher selling prices — a 'paper' boost that also raises taxable income. Remember the cost-flow assumption need not match the actual physical flow; you may ship a random carton yet still cost it under FIFO.
A shop buys 10 cans at 4 each, then 10 cans at 6 each, and sells 12 cans. FIFO assumes the first 10 (at 4) and 2 of the next batch (at 6) were sold: cost of goods sold = 40 + 12 = 52. Ending inventory is the 8 remaining newest cans at 6 = 48.
Oldest costs go to cost of goods sold; newest costs stay in inventory.
FIFO does not require shipping the physically oldest item — it is only an assumption about which cost to use. In rising prices it reports the highest profit and the highest ending inventory of the common methods.