Ethics Case - Lifo or Fifo

The following statement by the author is false because there is a difference in the amount of inventory reported on the balance sheet, depending on what method, LIFO or FIFO, a company values their inventory. If the following statement made by the author stated that the company used FIFO to maintain inventory records, then the following statement would be 100% true. The same ending inventory and cost of goods sold amounts are the same for perpetual inventory system and periodic inventory system when FIFO is used. This is because the same units and costs are first in and first out whether cost of goods sold is determined as each sale is made (perpetual) or at the end of the period as a residual amount (periodic). The issue that makes the statement false is the differences in the amount of inventory reported on the balance sheet for periodic LIFO and perpetual LIFO.

Inventory under periodic LIFO is determined by taking the ending inventory, and multiplying it by oldest unit prices. Using the cost of ending inventory, a company can then determine the cost of goods sold by simply subtracting from the cost of goods available for sale by ending inventory amount. Under perpetual LIFO, each time inventory is purchased or sold, the LIFO layers are adjusted. The company has to assume that the items sold come from the most recent layer of units purchased. Perpetual LIFO applies the same concept of periodic LIFO, which is the last-in first-out concept, but is applied several times during the period. Periodic LIFO applies the concept to total sales and total purchases only at the conclusion of a reporting period. Therefore, the two inventory systems will generally result in an ending inventory and cost of goods sold of different amounts. A simple is example is if a company has a beginning inventory of 100 units of goods for 1 dollar, and purchases of 100 units of goods at 2 dollar and 100 units at goods at 3 dollars, respectively. The ending inventory contained 100 units, which means 200 units were sold. Under periodic LIFO, ending inventory can simply calculated by multiply the ending inventory by the oldest unit cost, which is 1 dollar, thus ending inventory is 100 dollars and COGS is 500 dollars. Let's say during the period, 50 units were sold before the first purchase, 50 units were sold after the second purchase, and 100 units were sold after the third purchase. Under perpetual LIFO, the ending inventory would be 150 dollars and COGS is 450 dollars. This shows why the statement made by the author is false, because there is a difference in the amount of inventory reported by the way a company values its' inventory (LIFO vs. FIFO).

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