FIFO (First In, First Out)

How FIFO (First In, First Out) works

The FIFO principle treats inventory like a queue: whatever enters first also leaves the warehouse first. Every receipt is recorded with its receipt date and — in the valuation case — with its cost price. When goods are issued, the system draws on the oldest stock in each case. Physically, this means that the front, older batch on the shelf is picked first; in accounting terms, it means that the costs of the oldest receipt layer are assigned to the issue.

For valuation, FIFO effectively maintains several "layers" per item: each delivery forms a layer with its own quantity and its own price. When goods are sold, these layers are consumed from the bottom up — that is, from the oldest. The remaining stock therefore consists of the newest, most recently procured units and is valued at their prices. In times of rising purchase prices, this means the stock appears on the balance sheet at the higher, current prices, while the cost of goods sold is reported at the older, lower prices.

FIFO in inventory valuation

As a cost flow assumption, FIFO is a recognised method of inventory valuation. It is used when identical items were procured at different prices and the individual pieces in the warehouse can no longer be told apart. Instead of tracking each receipt individually, FIFO assumes a fixed issue order and thus makes valuation practicable and traceable. Alternatives are the LIFO method, the average method (moving or periodic average) and individual valuation.

Why FIFO matters

The practical benefit of FIFO lies first in avoiding ageing. For food, cosmetics, pharmaceuticals or chemicals, physical FIFO issue is often mandatory so that goods do not pass their best-before date and are lost as a write-off. Even for technical products with short innovation cycles, FIFO prevents older models from ageing in the warehouse. A consistent first-in-first-out flow thus reduces spoilage, impairment and disposal costs.

From a commercial point of view, FIFO is convincing thanks to its traceability: in many industries the valuation assumption matches the actual physical movement of goods, which makes the method plausible and audit-proof. Especially in combination with sound stock control and batch management, FIFO delivers an inventory value that stays close to the real procurement prices. For companies with high inventory tie-up, this is an important basis for realistically assessing tied-up capital, inventory turnover and the effect on results.

FIFO in the ERP system

In an ERP or inventory management system, FIFO is stored as valuation and issue logic and works automatically with every stock movement. On a goods receipt, the system creates a new price layer with quantity, date and cost price; on a goods issue, it posts the oldest available layer and calculates the cost of goods sold from it. The inventory value per item thus remains correctly updated at all times, without anyone having to manage the price order manually.

For physical FIFO control, the system relies on batch or serial numbers and on the best-before date: during picking, it proposes the oldest batch for issue. The prerequisite is a clean item master with defined units and the activation of batch management. In solutions such as xentral, weclapp or JTL, FIFO can be selected as a valuation method and coupled with batch management, so that valuation and physical goods flow are fed from the same data.

Distinction: FIFO vs. LIFO and the average method

FIFO, LIFO and the average method are alternative cost flow or valuation methods that differ only in the assumed order or price formation. FIFO (First In, First Out) charges the oldest receipts first and leaves the newest prices in stock. LIFO (Last In, First Out) does exactly the opposite: the most recently procured goods count as consumed first, and the stock is valued at the oldest prices. The average method smooths the differences by forming a weighted mean price across all receipts.

In the DACH region, the choice of method is also shaped by law. Under commercial law, § 256 HGB expressly permits cost flow methods such as FIFO and LIFO, provided they comply with the principles of proper accounting (GoB). For tax purposes the situation is narrower: § 6 (1) no. 2a EStG names only the LIFO method as an admissible cost flow method. FIFO is therefore only applicable for tax purposes if it matches the actual consumption sequence or leads to the lower value as an expression of the lower-of-cost-or-market principle. Anyone using FIFO under commercial law must therefore review the tax valuation separately where necessary.