Why first in, first out (FIFO) matters to a first-time founder
The cost-flow assumption changes reported cost of sales, inventory value and profit when purchase prices move. FIFO often resembles the physical rotation of perishable stock, but accounting and warehouse movement are separate choices. Founders need consistent records because valuation errors distort margins, tax calculations and purchasing decisions.
Examples of first in, first out (FIFO)
A retailer buys 100 units at ₹500 and later 100 at ₹700, then sells 120. Under FIFO, cost of goods sold is ₹64,000: all 100 older units at ₹500 plus 20 newer units at ₹700. Closing inventory is 80 units at the newer ₹700 cost, totalling ₹56,000.
Common misunderstanding
FIFO does not prove that the oldest physical item was actually sold first; it is an accounting cost-flow assumption. It also differs from LIFO, which assigns newer costs first and is prohibited under IFRS. Availability and tax treatment of inventory methods vary by accounting framework and jurisdiction.
When to use it
Choose an inventory method with an accountant when stock becomes material, then apply it consistently and disclose changes properly. Use physical stock rotation separately to manage expiry, damage and obsolescence. Review the method before changing accounting framework or entering a jurisdiction where local reporting or tax rules differ.