Understanding FIFO (First-In First-Out): Definition, Examples & Benefits

What Is FIFO?

FIFO, or First-In First-Out, is a data-handling and inventory management principle that ensures the earliest received item is the first one processed, sold, or removed. This straightforward rule underpins everything from computer science queues to supermarket shelving, making it essential knowledge for developers, accountants, and operations managers alike.

How FIFO Works

Imagine a single-lane bridge: the first car to enter is the first car to exit. FIFO works the same way. In programming, items are enqueued at the back and dequeued from the front. In warehouses, goods loaded onto a pallet first are picked first, preventing older stock from becoming obsolete or expired.

FIFO in Computing

Operating systems use FIFO queues for task scheduling, print spooling, and buffering data streams. Network routers rely on FIFO to forward packets in the order they arrive, reducing latency and ensuring fair resource allocation.

FIFO in Accounting & Retail

Under the FIFO valuation method, the cost of the earliest purchased inventory is assigned to the cost of goods sold (COGS). During periods of inflation, this typically results in lower COGS and higher reported profits, which can influence tax liabilities and financial ratios.

Benefits of FIFO

Reduced waste: By clearing older inventory first, businesses minimize spoilage and obsolescence. Accurate costing: FIFO aligns COGS with actual flow of goods, offering transparent financial statements. Simplified auditing: Because layers of stock move sequentially, tracking and verification are straightforward.

FIFO vs. LIFO & FILO

Unlike FIFO, LIFO (Last-In First-Out) assigns the newest inventory to COGS, which can lower taxable profit during rising prices but may leave old stock lingering. FILO (First-In Last-Out), often used in stack data structures, reverses FIFO logic entirely. Selecting the right method depends on industry regulations, tax strategy, and operational goals.

Key Takeaways

FIFO is a versatile, intuitive system that promotes freshness, transparency, and efficiency. Whether you are optimizing a database queue or managing a global supply chain, embracing the First-In First-Out approach can streamline processes, enhance compliance, and ultimately boost profitability.