Legal Definitions - first-in, first-out

First-In, First-Out (FIFO) is an accounting principle that assumes that the items of inventory purchased or produced earliest are the first ones to be sold, used, or removed from stock. This method is often used to value inventory and calculate the cost of goods sold, reflecting the natural flow of many businesses where older products are typically moved before newer ones.

• Example 1: Supermarket Produce Section

  A grocery store receives a new shipment of fresh berries every morning. When stocking the shelves, employees are instructed to place the newer berry containers behind the older ones, ensuring that the older containers are always at the front. This encourages customers to purchase the berries that arrived earlier.

  This scenario illustrates FIFO because the "first-in" items (the older berries) are the "first-out" (the first ones sold). By rotating stock this way, the supermarket minimizes spoilage and waste, ensuring customers always get the freshest possible produce while moving older inventory first.

• Example 2: Bookstore Inventory Management

  A bookstore receives a new shipment of a popular novel. They already have several copies from a previous order that have been on the shelves for a few weeks. To manage their inventory efficiently, the bookstore's system is set up to record the sale of the older copies first, even if a customer picks up a newly arrived copy from the front of the display.

  Here, the bookstore applies FIFO for accounting purposes. Even if the physical movement isn't strictly oldest-first, the accounting assumption is that the "first-in" books (the older stock) are considered "first-out" for calculating the cost of goods sold. This helps them accurately track profitability, especially if the cost of the books changed between shipments.

• Example 3: Pharmaceutical Warehouse

  A pharmaceutical distribution center stores various medications, each with a specific expiration date. When fulfilling orders for pharmacies, their inventory management system is programmed to select batches of medication with the earliest expiration dates first, even if newer batches are available.

  This is a critical application of FIFO, driven by safety and regulatory compliance. By ensuring that the "first-in" (oldest or earliest-expiring) medications are "first-out" (shipped and used), the warehouse minimizes the risk of expired drugs reaching patients and adheres to strict industry standards for product rotation and public safety.