First-in, first-out (FIFO) method is an inventory costing method that assumes that the costs of the earliest goods purchased are the first to be recognized as cost of goods sold.
The FIFO (first-in, first out) assumes that the earliest goods purchased are the first to be sold. FIFO often parallels the actual physical flow of merchandise; it generally is good business practice to sell the oldest units first.
Under FIFO, since it is assumed that the first goods purchased were the first goods sold, ending inventory is based on the prices of the most recent units purchased. That is, under FIFO, companies obtain the cost of the ending inventory by taking the unit cost of the most recent purchase and working backward until all units of inventory have been costed.