What is FIFO (First In, First Out)?

FIFO (First In, First Out) is an inventory management and accounting method where the first units received into inventory are the first units sold or shipped. Under FIFO, the oldest stock is always prioritized for fulfillment, ensuring that products move through the supply chain in chronological order of receipt. This principle applies both to physical inventory rotation in the warehouse and to cost accounting, where the cost of the earliest purchased goods is assigned to the cost of goods sold before the cost of more recently purchased goods.

Why It Matters

FIFO is essential for businesses selling perishable goods, products with expiration dates, or items subject to obsolescence. Without a disciplined first-in-first-out approach, older inventory sits in the back of the warehouse while newer shipments are picked first—leading to spoilage, expired products reaching customers, and eventual write-offs as dead stock. Even for non-perishable goods, FIFO prevents long-dwelling inventory from accumulating, which ties up capital and increases carrying costs.

From an accounting perspective, FIFO is one of the most widely accepted inventory valuation methods under both GAAP and IFRS. During periods of rising costs, FIFO assigns lower (older) costs to COGS and higher (newer) costs to remaining inventory, resulting in higher reported gross margins and a balance sheet that more closely reflects current replacement costs. This makes FIFO attractive for businesses seeking to present stronger financial performance, though it also means higher taxable income compared to LIFO alternatives.

How It Works

FIFO operates on two parallel tracks—physical and financial:

• Physical Rotation: Warehouse staff organize storage so that older inventory is accessible before newer inventory. When new shipments arrive, they are placed behind or below existing stock. Pick instructions direct workers to the oldest lots first, ensuring chronological rotation.
• Cost Assignment: When units are sold, the cost assigned to those units corresponds to the oldest purchase price in the inventory ledger. If a business purchased 100 units at $10 and later 100 units at $12, the first 100 units sold carry a $10 cost, regardless of which physical units were actually shipped.
• Lot and Batch Tracking: FIFO is enforced most effectively when combined with lot or batch tracking, where each inbound receipt is tagged with a date and lot number. The warehouse management system then sequences pick tasks based on receipt date, automating the rotation process.
• Inventory Valuation: At any point in time, the remaining inventory on the balance sheet reflects the most recent purchase costs, providing a valuation that closely approximates current market prices. This is particularly useful for financial reporting and inventory audits.

How Nventory Helps

Nventory supports FIFO-based inventory management by tracking receipt dates and lot information for every inbound shipment. When orders are routed for fulfillment, Nventory’s picking logic prioritizes the oldest available stock, ensuring proper rotation without requiring manual oversight. Batch-level visibility across all warehouses gives your team confidence that perishable or time-sensitive products are moving through the supply chain in the correct sequence. Combined with real-time inventory sync across sales channels, Nventory ensures your FIFO discipline extends from the warehouse floor to every storefront and marketplace where you sell.