The first in, first out (FIFO) method of inventory valuation is a cost flow assumption that the first goods purchased are also the first goods sold. In most companies, this assumption closely matches the actual flow of goods, and so is considered the most theoretically correct inventory valuation method

It is a cost formula used in assigning the cost to inventories which are ordinarily interchangeable. The FIFO formula is based on the assumption that the items of inventory which were purchased or produced first are consumed or sold first, and consequently the items remaining in inventory at the end of the period are those which have been most recently purchased or produced.

It is not applied where items of inventory are not ordinarily interchangeable.