In one sentenceAn inventory costing method that assumes the oldest quantities purchased are the first sold, so closing inventory is left at the most recent prices.
Simply put
Picture the milk shelf: the oldest is sold first. Using this idea, the cost of sales is calculated at the prices of the old batches, and what you bought recently remains in inventory.
When prices are rising, FIFO gives a lower cost of sales and higher profit than weighted average, and a closing inventory closer to the market price.
Worked example
The same store bought 100 cartons at 10 SAR and then 300 cartons at 12 SAR, and sold 250 cartons.
From the first batch100 × 10 = 1,000 SAR
From the second batch150 × 12 = 1,800 SAR
Remaining inventory150 × 12 = 1,800 SAR
Cost of sales = 1,000 + 1,8002,800 SAR
Don't confuse it with
Weighted average costUnder weighted average, the cost of the 250 cartons is 250 × 11.50 = 2,875 SAR.