FIFO stands for First-in, First-out cost flow assumption, which means the first (oldest) purchase prices are the ones we assign to COGS. In other words, the current inventory is assigned the most recent costs. A familiar physical cost flow example of this assumption would be milk. The stock clerk loads milk from inside the refrigeration unit, putting the newest milk in behind the older cartons or jugs. When you pull the frosty door open and grab the first jug off the shelf, you are buying the oldest milk. The newer stuff is in the back (that’s why parents often reach up behind the containers in front to get the fresher milk in the back).

However, the cost flow assumption doesn’t have to match the physical flow of goods. It’s just a method of assigning costs to items that we don’t track via specific identification.

Same data as before—the list of sales, by date:

And the purchases:

We’ll use the same worksheet format as before and do our calculations step by step, tracking purchases, COGS, and inventory on hand for each date that something happens, this time using the FIFO method of assigning costs to inventory.

This time we’ll use the color coding a bit differently. Light green represents 10 units of inventory we purchased in mid-October. In late October, we sold six of those units, so we had four left. In mid-November, we bought 25 more baseball bats at a higher price. At that point, we had four old bats at $10 each and 25 new, fresh bats at $12 each. Here’s where FIFO starts to look different from specific identification and weighted average.

On November 20, NewCo sold six more bats. Under FIFO, we’ll pull the oldest costs first, until that pool is depleted, and then we’ll go to the next oldest, and so on.

At the start of business on the 20th, NewCo had 29 bats in stock. Four of them were old, and 25 were newer. During the day, the company sold six bats. We don’t care which batch or pot or box they come from because we are using a cost flow assumption here that allows us to use the oldest costs first, regardless of when the bats were purchased or how much those particular bats actually cost.

We take the cost of four bats from the oldest batch, and that amount is depleted. Then, we assign the other two bats we sold on that day a cost basis from the next oldest batch, the November 15 purchase at $12 each.

On December 15, NewCo bought eight more bats at $15 each. The October 15 pool is gone. There are 23 bats left in the November 15 pool, and now eight in the newest pool. Again, these are all accounting pools, not physical bats. If you compare this list to the specific ID, where we actually tracked the cost of each bat, you’ll find them different.

On the 24th of December, then, the 19 bats all came out of the oldest pool of 23 bats from November 15 at $12, leaving four theoretical bats in that pool, and all eight theoretical bats in the newest (December 15) pool. The first bats we bought were the first ones we considered to be sold: FIFO or “last-in, still-here” (no accountant uses the acronym LISH though).

<tr”>Dec 24

0$10$0

Here is the entire table, completed:

Here is the gross profit calculation for FIFO using a perpetual inventory system:

Now that you have learned about FIFO, we’ll move on to cover LIFO next.