FIFO stands for first in, first out: the stock you got first is the stock you sell or use first. The term covers two related ideas. On the shelf, FIFO is a stock rotation habit that keeps older goods from expiring. In the books, FIFO is a way to work out what the items you sold actually cost you. Most small sellers use both, often without calling it by name.
This guide covers FIFO as a shelf practice, FIFO as a costing method, how it compares to LIFO, a worked example in dollars, and which small businesses rely on it.
FIFO as stock rotation
On the shop floor, FIFO means putting new stock behind old stock so the oldest items go out first. Grocery stores do it every day: new milk goes to the back of the fridge, older milk stays at the front.
For small sellers, it looks like this:
- Food trucks and coffee carts. Use the oldest milk, bread and prepped ingredients first. Label containers with the date they were opened or prepped so everyone on shift knows which to grab.
- Bakeries and market food stalls. Sell yesterday’s cookies before today’s (or mark them down), and keep dated batches separate.
- Candle, soap and cosmetics makers. Products with a shelf life or a scent that fades should be sold in the order they were made.
- Shops selling packaged food, drinks or snacks. Check best-by dates when restocking and move older stock to the front.
Why FIFO matters for food safety
For anyone handling food, FIFO is a basic food safety practice, not just a money saver. It reduces the chance of serving something past its use-by date and cuts waste from spoiled stock. Food safety inspectors commonly look for date labels and stock rotation. Check with your local health department for the exact rules that apply to your truck, cart or stall.
How to make FIFO a habit
- Date everything when it arrives or when you prep it.
- Stock from the back: new items go behind or under older ones.
- Keep one open container of each ingredient at a time where you can.
- Check dates during every stock count and pull anything close to expiring.
- Record spoiled or expired items as damaged stock, so your counts stay accurate and you can see what you’re wasting.
FIFO as an inventory costing method
The accounting side of FIFO answers a different question: when you’ve bought the same item at different prices, which cost do you use when you sell one?
Under FIFO, you assume the first units you bought are the first ones sold. So your cost of goods sold uses your oldest costs, and the stock left on your shelf is valued at your most recent costs. This matters for your profit, your tax return and your balance sheet.
The assumption is about costs, not physical items. A reseller who keeps all identical mugs in one box doesn’t know which mug was bought when, and doesn’t need to. FIFO just sets the order the costs get used up.
FIFO vs LIFO
LIFO stands for last in, first out. It’s the opposite assumption: the most recently bought units are treated as sold first, so cost of goods sold uses your newest costs and the leftover stock keeps your oldest costs.
| FIFO | LIFO | |
|---|---|---|
| Assumes sold first | Oldest stock | Newest stock |
| Cost of goods sold uses | Older costs | Newer costs |
| Ending inventory valued at | Newer costs | Older costs |
| When prices are rising | Lower COGS, higher reported profit | Higher COGS, lower reported profit |
| Matches physical flow | Usually, for most goods | Rarely |
| Allowed under IFRS | Yes | No |
| Allowed under US GAAP and for US taxes | Yes | Yes, with conditions |
Where LIFO is and isn’t allowed
International Financial Reporting Standards (IFRS), used in much of the world, don’t permit LIFO; the inventory standard, IAS 2, allows FIFO and weighted average cost instead (plus specific identification for certain items). In the US, LIFO is allowed under GAAP and for federal taxes, but it comes with conditions. You have to elect it with the IRS by filing Form 970 with your tax return, and under the LIFO conformity rule, a business that uses LIFO for taxes generally has to use it in the financial statements it gives owners and lenders too. The IRS explains inventory methods in Publication 538.
For most small sellers, FIFO is the simpler choice, and it matches how stock actually moves. Talk to your accountant or tax preparer before choosing or changing an inventory method, since changing methods later generally needs IRS approval.
A worked FIFO example
A market seller resells hand-poured candles. Over a season, the maker raises the wholesale price:
- In April, the seller buys 100 candles at $5 each ($500).
- In July, the seller buys 100 more at $6 each ($600).
- By the end of the season, the seller has sold 150 candles at $15 each, for $2,250 in sales.
That leaves 50 candles on hand. Here’s how the numbers work out under each method.
Under FIFO
The first 100 sold are costed at $5, and the next 50 at $6.
- Cost of goods sold = (100 × $5) + (50 × $6) = $500 + $300 = $800
- Ending inventory = 50 × $6 = $300
- Gross profit = $2,250 − $800 = $1,450
Under LIFO
The most recent 100 are costed at $6, and the remaining 50 sold at $5.
- Cost of goods sold = (100 × $6) + (50 × $5) = $600 + $250 = $850
- Ending inventory = 50 × $5 = $250
- Gross profit = $2,250 − $850 = $1,400
Under weighted average cost
A third common method averages all the costs together: $1,100 ÷ 200 candles = $5.50 each.
- Cost of goods sold = 150 × $5.50 = $825
- Ending inventory = 50 × $5.50 = $275
- Gross profit = $2,250 − $825 = $1,425
| Method | Cost of goods sold | Ending inventory | Gross profit |
|---|---|---|---|
| FIFO | $800 | $300 | $1,450 |
| Weighted average | $825 | $275 | $1,425 |
| LIFO | $850 | $250 | $1,400 |
In every case, the total cost is the same $1,100. The methods only change how it’s split between what sold and what’s left. When costs are rising, FIFO shows the highest profit and the highest stock value; LIFO shows the lowest. When costs fall, it flips. For a small seller, the difference in one season is modest, but it adds up and it affects taxable income, which is why the choice is worth making deliberately.
FIFO’s cost of goods sold also feeds straight into your inventory turnover ratio and your margins. To test prices against costs, try the profit margin calculator.
Which small businesses use FIFO?
Almost any business that sells physical goods can use FIFO. It’s a natural fit for:
- Food trucks, coffee carts, bakeries and caterers, where the oldest ingredients have to be used first anyway, so the books match what really happens.
- Farmers market vendors selling produce, preserves, honey or baked goods with a shelf life.
- Makers of candles, soap, skincare and cosmetics, where products age.
- Boutiques and gift shops where seasonal or trend-driven stock should sell before newer stock arrives.
- Resellers whose supplier prices change, who want their stock value to reflect recent costs.
Whatever method you use, it only works if you know what you have and what each batch cost. That starts with clear SKUs, a cost recorded for each product, and regular counts. If you’re new to the basics, read what inventory is first.
Keeping FIFO records with SleepingFire
SleepingFire doesn’t do FIFO or LIFO costing automatically. What it does give you is the raw material: a cost and SKU on every product, stock counts that drop with each sale, adjustments with reasons when stock is received, damaged or returned, and an inventory valuation report at cost that you can export as CSV for your accountant. Logging expired food as damaged stock also shows you exactly what poor rotation is costing. See how inventory management works.