The example 3 on CFAI Text Vol 3, P.414~416 resulted in lower ending inventory and higher cost of sales under the decreasing cost. On the other hand, an example in Schweser Note indicates that lower ending inventory and higher cost of sales will be resulted from increasing cost environment (inflation) too. This seems to be discrepant.
Anyone can clarify ? Thanks !
I don’t have the Schweser notes and I don’t have the CFAI books with me (i’m at work) but let me see if I can help you:
You sell the newly bought stuff first under LIFO, so under decreasing costs you are selling the lowest cost goods and hence have lower COGS, greater net income and higher inventory (the higher cost goods remain on the BS). The perpetual system exagerates this as you are selling the most immediate stock intake, rather than an average of the last batch.
Under increasing costs, you are selling the higher priced goods first so have higher COGS, lower NI and lower inventory. Again, the perpetual system exagerates this.
Can we say that, comparing with perpetual system, periodic system is more accurate in measuring COGS, ending inventory and NI ?
Hmmm, I don’t know. I’ve never considered either one to be more accurate, have you seen a question on this? The only system I would rate as ‘more accurate’ is specific identification.
Not sure about perpetual vs. periodic, but there are definitely some questions that ask what is a better measure of Inventory and COGS, FIFO or LIFO.
In both rising and falling cost environments, LIFO is better for COGS and FIFO is better for inventory.
In both cases you are better reflecting current costs. In COGS, you want to reflect recent prices - LIFO - whereas in inventory, you want to reflect the recent prices in your inventory and shed the old prices - FIFO.
Sorry, what I meant was :
Comparing with perpetual system, periodic system is more accurate in measuring COGS, ending inventory and NI _ under LIFO _ ? What is the concusion in example 3 on CFAI Text Vol 3, P.414~416 ? Is the conclusuion simply that "they will have different COGS, ending inventory and NI ?
Can u tell supoose in inflationary environment
What will be difference in LIFO method in perpetual and periodic for COGS,Inventory ?
Perpetual system (comaring with periodic system) COGS : higher, Ending Inventory : Lower, NI : lower
Does this mean that there are some distortions with LIFO under perpetual and LIFO under periodic shall be the “real LIFO” ? Sorry, I am still confused !