LIFO periodic and perpetual system

CFA Level I
#1

I have a question.

Lets suppose that prices are rising. What would be the differences in COGS and inventory between two firms that used LIFO, but one uses perpetual inventory and the other periodic inventory???

thanks

#2

Do you have a specific question this is on? It would mainly depend on when the sales happened.

Ex) Purchase 1 @ 10 on Jan 1st, 2 @ 11 on Jan 31st, 5 @ 13 on March 1st.

Sales: 3 @ 15 on Feb 11th.

Under Perpetual your COGS would be based on your inventory AT THE TIME OF THE SALE. You have 3 units of inventory, 2 @ 11, 1 @ 10 for a COGS of 31.

Under Periodic (lets use quartely here) you calc COGS based on inventory at the end of the quarter. you sold 3 units, the last one into inventory at March 31 is the March 1st lot of 5 @ 13. COGS would be 39.

Someone feel free to correct me on any inaccuracies.

Edit: Sorry for the shit formatting

1 Like
#3

No question, just a doubt I have… If we have a question like this, but without number, what would be the answer?

#4

As Yayyywork stated in his numeric example.

Using LIFO in a periodic system results in higher COGS and lower ending inventory than in a perpetual system.

Periodic has higher COGS because it is calculated using always the newest units purchased of the whole accounting period; however, in perpetual this is not necessarily true because you calculate COGS using the newest units purchased just previously at each sale date (no at the end of the whole period), which implies you use some “older” units in comparisson of the periodic system. This is why in a rising-prices enviroment COGS will always be higher on periodic than perpetual system in LIFO.

Hope this helps

#5

Coincidentally, this last week I’ve been teaching inventory methods in my beginning accounting classes, so I’ve covered this very idea four times.

Let me start with a slight correction: you’re interested in what happens when _ costs _ are rising, not when prices are rising. ( Cost is what you pay your suppliers; price is what your customers pay you.) Many authors and teachers are very sloppy in their language, and mistakenly say “price” when they mean “cost”. It’s best to avoid that blunder.

The general rule – which makes sense when you think about it – is that perpetual inventory is closer to FIFO than periodic inventory. (Periodic FIFO and perpetual FIFO give identical results.)

Thus:

  • When costs are rising, we know that FIFO gives lower COGS and higher ending inventory than periodic LIFO, so perpetual LIFO gives lower COGS and higher ending inventory than periodic LIFO.
  • When costs are falling, we know that FIFO gives higher COGS and lower ending inventory than periodic LIFO, so perpetual LIFO gives higher COGS and lower ending inventory than periodic LIFO.
#6

Nice one S2000magician

#7

Thanks, olaj!