Pepetual Inventory System, Moving Average
Cost of goods available
Cost of goods sold
Date Transaction Units 9/1/00 Beginning
2,000 500 2,500 $10.20
$20,000 5,500 $25,500
2,500 (800) 1,700 $10.20
$25,500 ($8,160) $17,340
1,700 1,000 2,700 $11.05
17,340 12,500 $29,840
2,700 (2,000) 700 $11.05
29,840 (22,104) $7,736
First-In, First-Out (FIFO) Under FIFO it is assumed that the cost of goods sold are recorded based on the order that the merchandise was purchased. The best way to think about FIFO is to think about the sale of milk. The grocery store puts the oldest milk in front so that it will be sold first. The milk that was purchased most recently will be part of ending inventory whereas the older milk will be part of the cost of goods sold.
Using the FIFO cost flow assumption the cost of goods sold and ending inventory are identical under the perpetual and periodic inventory systems. Ending inventory is based on the most recently purchased merchandise. Cost of goods sold is based on the oldest inventory and ending inventory is based on the merchandise purchased most recently.
In many cases the FIFO method approximates the physical flow of goods. The balance sheet reflects an ending inventory that is valued at current costs. The major disadvantage to the FIFO assumption is that in inflationary times the cost of goods sold can be materially distorted. If the costs in beginning inventory are substantially lower than current costs, gross profit is overstated by the amount of inflation that took place during the accounting period.
Example: Assuming the same facts as above the cost of goods sold and ending inventory using the FIFO cost flow assumption is as follows: