Question:FIFO, LIFO, and averaging have now been presented. How does all of this material come together for reporting purposes?
How does the application of a cost flow assumption impact the operation of a periodic or a perpetual inventory system?
Don't use plagiarized sources. Get Your Custom Essay on
Just from $13/Page
Answer: Each company that holds inventory must develop a mechanism to both (a) monitor the balances and (b)
allow for the creation of financial statements. If a periodic system is used, officials simply wait until financial
statements are to be produced before taking a physical count. Then, a formula (beginning inventory plus all
purchase costs less ending inventory) is applied to derive cost of goods sold.
In contrast, a perpetual system maintains an ongoing record of the goods that remain on hand and those that have
been sold. As noted, both of these systems have advantages and disadvantages.