I was going over a problem that asked what would give the greatest difference between gross profit when using perpetual inventory system or a periodic inventory systmem.
a)LIFO
b)FIFO
c) specific identification
I thought it should be FIFO… because with LIFO, COGS is always tracking with the most current sales so therefore the timing of when you do the recording (constantly with perpetual or at the end of a period with periodic) shouldn’t matter. LIFO should give the most similar COGS, not the most different, right?
FIFO periodic and FIFO perpetual give the same results. Always.
Specific identification periodic and specifis identification perpetual give the same results. Always.
LIFO periodic and LIFO perpetual likely give different results.
It is not required in question above but Weighted-average cost method as well as LIFO periodic and perpetual give different results while FIFO and spec. identification are not impacted by.
LIFO and average cost perpetual are closer to FIFO than are LIFO and average cost periodic, respectively.
I still don’t understand why FIFO will give greater similarity between perpetual and periodic. I am thinking of it given this simple made up example
time 1 cost of goods $3 sold 2 units
time 2 cost of goods $5 sold 2 units
time 3 cost of goods $7 sold 2 units
perhaps the following is where am I going wrong…
under LIFO… perpetual system will give COGS as ($3*2)+($5*2)+($7*2)… the periodic system will give COGS as ($7*6)
Under FIFO… perpetual system will give COGS as (same as above) … the periodic system will give COGS as ($3*6)
what I have just spelled out shows both LIFO and FIFO as being equally different in perpetual vs. periodic. what am I missing?
I don’t understand your example. You say that under periodic FIFO, COGS = $3 × 6. How did you get that? The only way would be for the beginning inventory to have at least 6 units with a cost of $3. If that were the case, then perpetual FIFO COGS = $3 × 6.
FIFO COGS is the same under a perpetual inventory system and a periodic system, so is FIFO ending inventory. Whether you record COGS with each sale (perpetual) or at the end of the year (periodic), the oldest units are the oldest units: they’re the same under perpetual inventory and periodic inventory.
ok, right, I forgot the part where you don’t just use the earliest price in FIFO, but you actually go back and account for number of units at each price level as they are used up… I made this example too simple.
I think i get it now… LIFO periodic is like looking back and filling the orders backwards. ( if you sold 10 units in the period, and only 3 in the inventory were in the “last in” price range, you will account for those first… and then the rest of the 7 units going backwards)
The FIFO system counts going forwards, which better aligns with the perpetual system.
Exactly.
To get COGS under FIFO you start from the oldest and work forward, and the oldest units are the same under perpetual and periodic systems.
To get COGS under LIFO you start from the newest and work backward, and the newest units are likely different under perpetual and periodic systems; i.e., newest as of each sale is likely not the same as newest as of the end of the year.
Yes! thanks… now where’s the advil 