What accounts for the difference in inventory values between periodic LIFO and perpetual LIFO?

Difference Between Periodic LIFO and Perpetual LIFO

The difference between periodic LIFO and perpetual LIFO involves the time at which the latest inventory costs are removed from the inventory account:

  • With periodic LIFO, the latest costs are assumed to be removed from inventory at the end of the accounting year
  • With perpetual LIFO the latest costs are removed from inventory at the time of each sale.

Example of Difference Between Periodic LIFO and Perpetual LIFO

Assume that a company's accounting year is January 1 through December 31 and the company sells only one type of product. In its beginning inventory are 2 units with a cost of $10 each. The company sells 1 unit on March 1. On April 1, the company purchases 5 units at a cost of $11 each. On September 1, the company sells 3 units. In summary, the company had 2 units on January 1, purchased 5 units on April 1, sold 4 units during the year, and has 3 units on hand at December 31.

With periodic LIFO the costs of the latest purchases starting with the end of the year are removed first. Since 4 units were sold during the year, the costs removed from inventory and charged to the cost of goods sold will be the last cost of 4 units, which is $11 each. This means the cost of its December 31 inventory using periodic LIFO will be $31 (1 unit at $11 plus 2 units at $10).

With perpetual LIFO the costs of the latest purchases as of the date of each sale are removed first. On March 1, the latest cost at that time for the 1 unit sold was $10. At the time of the sale on September 1, the latest cost of the 3 units sold was $11 each. Using perpetual LIFO, the company's cost of goods sold will be $43 (1 at $10 and 3 at $11), and its inventory will be reported at a cost of $32 (2 units at $11 and 1 unit at $10).

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