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In: Accounting

Is there a difference in terms of cost of sales when you are using fifo under...

Is there a difference in terms of cost of sales when you are using fifo under perpetual inventory system and using fifo under period inventory system?
if so, could you please give me an example that demostrates such difference?
Thank you!

Solutions

Expert Solution

In perpetual method , we record each and every stock movement as and when they occur and maintain details of inventory , cost of goods sold at all the times. So Inventory and Cost of Sales keeps on changing for every transaction.

Whereas in periodic method , stock movements will be recorded periodical basis on physical verification of stocks and then cost of sales will be calculated by adding purchases to the opening stock value and reducing the inventory value. Inventory value is taken as the value of latest stock purchased.

Lets take the following Example

Stock statement as per perpetuity method
Purchases Sales Inventory
DATE Qty Unit Cost($) Total Cost($) Qty Unit Cost($) Total Cost($) Qty Unit Cost($) Total Cost($)
Jul-02 600 12 7200 600 12 7200
Jul-05 200 13 2600 600 12 7200
200 13 2600
Jul-13 100 12 1200 500 12 6000
200 13 2600
Jul-21 325 14 4550 325 12 3900 175 12 2100
200 13 2600
325 14 4550
Total 14350 5100 9250
Now lets calculate COGS as per periodic method
Units left in Stock 700
so value of inventory @ latest stock receipts 325*14= 4550
200*13= 2600
175*12= 2100
Total 9250
Value of cost of sales = Opening Stock+ Purchases -Inventory = 0 + 14350 -9250 = 5100
So , Ultimate impact and result on cost of sales is same in both the cases but it is recommendatory to use perpetuity method as we can have more details about stock movements

ekkarill92 answered 9 months ago
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