The FIFO method assumes the first inventory costs acquired are the first costs assigned to cost of goods sold. To calculate FIFO, take units sold from the oldest cost layer first; the newest layers remain in ending inventory. FIFO is a cost-flow assumption, so it can be used even when individual physical units are not tracked in that exact order.
FIFO COGS = cost of the oldest units available, taken layer by layer until all units sold are assigned
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Ending inventory = cost of goods available for sale − FIFO COGS
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Beginning inventory is the stock carried into the period. It is usually the oldest layer, so FIFO normally uses it before current-period purchases. Keep both its quantity and unit cost.
Purchases create new layers. Record their dates, quantities, and unit costs in chronological order. Freight and other costs included under the applicable accounting policy belong in inventory cost rather than being ignored.
Units sold tell you how many costs to remove from the layer schedule. Sales revenue is separate: it uses the selling price, while FIFO COGS uses historical inventory costs.
Ending inventory units equal units available minus units sold. Under FIFO, price those remaining units from the newest layers backward.
A campus bookstore sells identical financial calculators. It begins September with 75 units costing $14.60 each. It buys 110 units at $15.25 and later 95 units at $16.10. During the month it sells 205 units for $24.50 each.
There are 280 units available and their total cost is $4,302. The sale consumes all 75 beginning units, all 110 units from the next layer, and 20 units from the newest layer. That assigns exactly 205 units to COGS and leaves 75 units, all at $16.10.
| Step | Units and cost | Amount |
|---|---|---|
| Beginning layer to COGS | 75 × $14.60 | $1,095.00 |
| First purchase layer to COGS | 110 × $15.25 | $1,677.50 |
| Part of newest layer to COGS | 20 × $16.10 | $322.00 |
| FIFO cost of goods sold | 205 units | $3,094.50 |
| Ending inventory | 75 × $16.10 | $1,207.50 |
| Check | $3,094.50 + $1,207.50 | $4,302.00 |
The FIFO COGS is $3,094.50 and ending inventory is $1,207.50. Revenue is $5,022.50 because 205 calculators sold for $24.50 each, so gross profit is $1,928.00. The $16.10 unit cost is not used as the selling price; it is only the cost attached to the latest inventory layer.
A periodic system waits until the end of the period to calculate COGS after a physical count. A perpetual system removes layer costs each time a sale occurs. For FIFO, the total COGS is normally the same under both systems because every sale always begins with the oldest cost still available. The records differ in timing, but later purchases do not jump ahead of older layers.
The calculation still needs a dated layer schedule in a perpetual problem. After each sale, cross out the units used and carry the remainder forward. After each purchase, add a new layer below the layers already on hand. This avoids accidentally using inventory that had not yet been purchased on the sale date.
When unit costs rise, FIFO sends older, lower costs to COGS and leaves newer, higher costs in ending inventory. Compared with LIFO, that generally means lower COGS, higher gross profit, and a higher inventory asset. When costs fall, the direction reverses. FIFO itself does not guarantee higher profit; the price pattern determines the comparison.
FIFO ending inventory often reflects more recent purchase costs because the newest layers remain. That does not mean inventory is measured at current market value. It remains based on assigned historical cost and is also subject to the applicable lower-of-cost measurement rules.
Starting with the newest layer. That is LIFO. Under FIFO, sort acquisition dates from oldest to newest and begin at the top.
Using the final purchase price for every unit sold. FIFO preserves layers. Only the units drawn from a given layer receive that layer's cost.
Forgetting beginning inventory. Beginning stock is usually the first FIFO layer, not a separate amount added after COGS has been calculated.
Mixing cost and selling price. COGS comes from inventory costs. Revenue comes from selling price. Gross profit is revenue less COGS.
Failing the reconciliation. Units available must equal units sold plus ending units. Total cost available must equal COGS plus ending inventory. If either check fails, a layer was omitted or counted twice.
IAS 2 permits FIFO for ordinarily interchangeable inventory, and FIFO is also permitted under U.S. GAAP. It often fits businesses whose older physical goods are sold first, such as food or medicine, but physical similarity is not required for the cost assumption. Items that are not ordinarily interchangeable or are produced for specific projects may instead require specific identification.
Apply the chosen cost formula consistently to inventories with a similar nature and use. A classroom exercise gives you the method; a real entity also needs a documented accounting policy and accurate inventory counts.
Set up four columns: acquisition date, units acquired, unit cost, and units remaining. Extend each layer to dollars before processing any sale. As units sell, reduce the oldest layer's remaining quantity to zero before moving to the next layer. Never rewrite the unit cost of a partially used layer; only its quantity changes.
For the calculator example, the layer worksheet begins with 75 units at $14.60, followed by 110 at $15.25 and 95 at $16.10. After assigning 205 units to COGS, the remaining-quantity column shows zero, zero, and 75. Multiplying the last quantity by its unchanged $16.10 cost immediately gives $1,207.50 ending inventory. This layout is especially useful when a sale crosses several layers.
If a perpetual problem contains several sales, process them one at a time even though FIFO commonly reaches the same period total as periodic FIFO. The dated work proves that every cost assigned to a sale was actually available on that date. It also gives the journal-entry amount at each sale: debit COGS and credit Inventory for the layer costs relieved. The separate sales entry debits Cash or Accounts Receivable and credits Sales Revenue at selling price.
Finally, distinguish an inventory write-down from FIFO costing. FIFO assigns historical costs between COGS and ending inventory. A lower-of-cost measurement test is a separate step performed after the cost assignment under the applicable framework. Do not replace the FIFO layer cost with a current selling price while building the schedule.
For FIFO, assign units sold to the oldest cost layers first and value the remaining units from the newest layers. Always reconcile both units and dollars before accepting the answer.
FIFO is an inventory cost-flow assumption that assigns the earliest costs acquired to COGS first. The newest costs remain in ending inventory.
Subtract units sold from the oldest layers first. Price the units left using the newest remaining cost layers, or subtract FIFO COGS from total cost available.
Not necessarily. FIFO assigns costs. A business may physically rotate old goods first, but the accounting method does not require tracking each physical unit unless specific identification is used.
Yes. IAS 2 permits FIFO for ordinarily interchangeable inventory, and FIFO is also an accepted inventory cost assumption under U.S. GAAP.
When costs rise, FIFO expenses older, lower costs first. Lower COGS produces higher gross profit than a method that expenses newer, higher costs, all else equal.
FIFO normally produces the same total COGS and ending inventory under both systems because the oldest available costs are always relieved first, though the recording timing differs.
By the FinanceBrain Team · Last verified July 12, 2026 · How we produce and verify articles