Question

Which of the following inventory cost flow assumptions produces the same ending inventory values under both the periodic and perpetual systems? FIFO OLIFO weighted average dollar-value LIFO

Answer 1

The correct answer is first option - FIFO

FIFO (First-in, first-out) method is based on the perception that the first inventories purchased are the first ones to be sold. It is a cost flow assumption for most companies. Since the theory perfectly matches to the actual flow of goods, therefore it is considered as the right way to value inventory. Also, it is more logical approach, as oldest goods get sold first, thereby reducing the risk of getting obsolete.

In the FIFO process, goods which are purchased earlier are the first ones to get removed from the inventory account and the remaining goods are accounted for the recently incurred costs. As a result, the inventory asset recorded in the balance sheet has cost figures close to the most recent obtainable market values. By this method, older inventory costs are matched against current earnings and are recorded in cost of goods sold. This gives an idea that gross margin doesn’t essentially reflect on matching the cost and revenue numbers. During inflation, current-cost revenue is matched against older and low-cost inventory goods, which results in maximum gross margin. FIFO way of valuing inventory is accepted in international standards. It yields same results for both periodic and perpetual inventory system.

LIFO - Under LIFO Periodic & Perpetual systems give different results as the perpetual keeps a continuous track on the inventory but in case of Periodic it is hard to keep an exact track and thus the results on an overall basis vary.

Similarly it goes the same for weighted average method