How to calculate LIFO and FIFO Perpetual
The basic concept underlying perpetual LIFO is the last in, first out (LIFO) cost layering system. Under LIFO, you assume that the last item entering inventory is the first one to be used. For example, consider stocking the shelves in a food store, where a customer purchases the item in front, which was likely to be the last item added to the shelf by a clerk. These LIFO transactions are recorded under the perpetual inventory system, where inventory records are constantly updated as inventory-related transactions occur. Show What is Periodic LIFO?In a periodic LIFO system, inventory records are only updated at the end of a reporting period. Comparing Perpetual LIFO and Periodic LIFOThe only difference between the two cost flow concepts is how rapidly a cost layer is stripped away or replenished in the costing database. Under perpetual LIFO, there can be a great deal of this activity throughout a reporting period, with inventory layers being added and eliminated potentially as frequently as every day. This means that the costs at which items are sold could vary throughout the period, since costs are being drawn from the most recent of a constantly varying set of cost layers. Under a periodic LIFO system, however, layers are only stripped away at the end of the period, so that only the very last layers are depleted. In a period of continually increasing prices, a periodic LIFO system will result in the highest cost of goods sold and therefore the lowest net income, since it will always use up the most recently purchased inventory first. Conversely, in a period of decreasing prices, the reverse would be true. The costing results of a perpetual LIFO system are more common than a periodic LIFO system, since most inventory is now tracked using computerized systems that maintain inventory records on a real-time basis. Example of the Perpetual LIFO and Periodic LIFO SystemsABC International acquires 10 green widgets on January 15 for $5, and acquires another 10 green widgets at the end of the month for $7. ABC sells five green widgets on January 16. Under a perpetual LIFO system, you would charge the cost of the five widgets sold on January 16 to the cost of goods sold as soon as the sale occurs, which means that the cost of goods sold is $25 (5 units x $5 each). Under a periodic LIFO system, you would wait until the end of the month and then record the sale, which means that you remove five units from the last layer recorded at the end of the month, which results in a charge to the cost of goods sold of $35 (5 units x $7 each).
Example 1 shows that per unit purchase cost increases continuously throughout the period ($10 --> $12 --> $14 --> $15). FIFO assumes that items purchased FIRST are sold FIRST.
--> When price goes up, old price is lower than recent price. LIFO assumes that items purchased LAST are sold FIRST. --> When price goes up, recent price is higher than old price. FIFO, Perpetual Cost of Goods Sold = FIFO, Periodic Cost of
Goods Sold FIFO, Perpetual Inventory Cost = FIFO, Periodic Inventory Cost LIFO, Perpetual Cost of Goods Sold < LIFO, Periodic Cost of Goods Sold LIFO, Perpetual Inventory Cost > LIFO, Periodic Inventory Cost ($7,200 > $6,000) Moving average, Perpetual Cost of Goods Sold Is perpetual LIFO or FIFO?With perpetual LIFO, the last costs available at the time of the sale are the first to be removed from the Inventory account and debited to the Cost of Goods Sold account. Since this is the perpetual system we cannot wait until the end of the year to determine the last cost (as is done with periodic LIFO).
Can LIFO be used on perpetual inventory system?Perpetual Inventory System Using LIFO. Under the perpetual inventory system, we determine the COGS and inventory after every sale instead of waiting until the end of the year. This requires much more work and is only recommended if you use inventory management software that can integrate with your accounting software.
How is perpetual inventory calculated?The selection of the inventory system determines when the cost of goods sold is calculated. For the perpetual inventory system, each sale of goods and each purchase of inventory updates inventory balances as the sale is recorded and the goods are received rather than at the end of the accounting period.
Is LIFO perpetual or periodic?A periodic LIFO inventory system begins by computing the cost of ending inventory at the end of a period and then uses that figure to calculate cost of goods sold. Perpetual LIFO also transfers the most recent cost to cost of goods sold but makes that reclassification at the time of each sale.
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