What is FIFO (First-In, First-Out)?

First-In, First-Out (FIFO) is an inventory valuation method that assumes the first items placed in inventory are the first ones to be sold. It is one of the most common methods for managing inventory and calculating the Cost of Goods Sold (COGS).

For Startups: For D2C or e-commerce startups selling physical products, especially perishable goods, FIFO is the most logical method. It ensures that older inventory is sold first, reducing the risk of spoilage or obsolescence. From an accounting perspective, during periods of rising prices, FIFO results in a lower COGS, a higher gross profit, and a higher taxable income.

Example: A coffee startup buys 100 bags of coffee at ₹500 each, and a month later buys another 100 bags at ₹550. When it sells 120 bags, under FIFO, the COGS will be calculated using the cost of the first 100 bags (at ₹500) and 20 of the second batch (at ₹550).