FIFO (First-In, First-Out) is an inventory valuation and cost accounting method in which it is assumed that the oldest units of inventory purchased or produced are the first to be sold or consumed, meaning that the cost of goods sold (COGS) is calculated based on the earliest acquisition costs while the ending inventory on the balance sheet reflects the most recently incurred costs. FIFO is one of the three primary inventory accounting methods alongside LIFO (Last-In, First-Out — not permitted under Ind AS) and the Weighted Average Cost method. During periods of rising input costs and inflation, FIFO results in lower COGS, higher reported gross profit, and higher inventory valuations compared to LIFO or weighted average. In India, Ind AS 2 (Inventories) permits FIFO and weighted average but prohibits LIFO. For equity analysts and investors on Ventura Securities evaluating manufacturing, retail, pharma, and FMCG companies, understanding which inventory valuation method a company uses is essential for making accurate gross margin comparisons across peers and correctly interpreting the impact of commodity price cycles on reported profitability.
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