The LIFO periodic system and the LIFO perpetual system may generate different cost of goods sold (or materials issued) and the cost of ending inventory figures. The reason is that under LIFO periodic system, the total of sales (or issues) is matched with the total of purchases (including beginning inventory, if any) at the end of the period whereas under LIFO perpetual system, each sale (or issue) is matched with the immediate preceding purchases.

For better understanding of the concept, we need an example.

Example – LIFO periodic vs LIFO perpetual:

The Fine Dealings Inc. has the following transactions for the second month of operations:

Date Purchases Sales
July  01 10,000 units @ $10.00 per unit
”   05 15,000 units @ $10.20 per unit
”   10 12,000 units
”   15 5,000 units @ $10.50 per unit
”   20  — 6,000 units
”   25 10,000 units @ $10. 75 per unit
”   30 5,000 units

The Fine Dealings Inc. uses last-in, first out (LIFO) method for inventory valuation purposes. There was no inventory on hand at the beginning of the month of July.

Required: Compute the cost of goods sold during the month and inventory on hand at the end of the month under:

  1. LIFO periodic system.
  2. LIFO perpetual system.

Solution:

(1). LIFO periodic:

Number of units purchased during the month *40,000 units
Less number of units sold during the month **23,000 units
—————
Ending inventory 17,000 units
—————
From 01 July purchases 10,000 units × $10.00 $100,000
From 05 July purchases 7,000 Units × $10.20 $71,400
—————
Cost of ending inventory $171,400
—————
Cost of units available for sale during the month ***$413,000
Less ending inventory $171,400
 —————
Cost of goods sold (COGS) during the month 241,600
—————

* 10,000 units + 15,000 units + 5,000 units + 10,000 units
= 40,000 units

**12,000 units + 6,000 units + 5,000 units
= 23,000 units

***[(10,000 units × $10) + (15,000 units × $10.20) + (5,000 units × $10.50)+ (10,000 units × $10.75)]
= [$100,000 + $153,000 + $52,500 + $107,500]
= $413,000

 (2). LIFO perpetual:

Date Purchases Sales Balance
July. 01
10,000 × $10.00 = $100,000 10,000 × $10.00 = $100,000
July. 05 15,000 × $10.20 = $153,000 10,000 × $10.00 = $100,000
15,000 × $10.20 = $153,000
$253,000
 July. 10 12,000 × $10.20 = $122,400 10,000 × $10.00 = $100,000
3,000 × $10.20 = $30,600
$130,600
  July. 15
5,000 × $10.50 = $52,500 10,000 × $10.00 = $100,000
3,000 × $10.20 = $30,600
5,000 × $10.50 = $52,500
$183,100
  July. 20
5,000 × $10.50 = $52,500
1,000 × $10.20 = $10,200
$62,700

10,000 × $10.00 = $100,000
2,000 × $10.20 = $20,400

$120,400
  July. 30 10,000 × $10.75 = 107,500 10,000 × $10.00 = $100,000
2,000
× $10.20 = $20,400
10,000 × $10.75 = $107,500
$227,900
5,000 × $10.75 = $53,750 10,000 × $10.00 = $100,000
2000
× 10.20 = $20,400
5,000 × $10.75 = $53,750

$174,150
Total $413,000 $238,850 $174,150

Notice that the cost of goods sold and ending inventory amounts computed under LIFO periodic are different from the cost of goods sold and ending inventory amounts computed under LIFO perpetual. The reason is that the LIFO periodic system does not take into account the exact dates involved but LIFO perpetual does. In above example, LIFO periodic system assumes that all the units purchased on July 30 have been sold and ending inventory is to be valued using earliest costs. But if computations are made on the basis of LIFO perpetual system, out of 10,000 units purchased on July 30, 5000 units remain unsold and go to ending inventory at the same cost at which they were purchased.

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