Suppose you are the controller of a company that sells inventory. Suppose, too, that the economy currently enters a period of high inflation. Although profits are higher this year than last year, you realize that the cost to replace inventory is also higher. You are aware that many companies are changing to the Last-In First-Out (LIFO) inventory method to save on taxes in the current year; however, you are concerned that when prices eventually decline, the LIFO method will result in higher taxes. Because declining prices are usually equated with economic recession, it is likely that the higher taxes will be paid when revenues are declining. What factors should you consider before making a change to LIFO? Based on the above considerations, what would you recommend? This is the questions and this is my response. I just want to make sure I am on the right page and if there is anything else I need to provide.
The perpetual inventory continuously will be able to describe and track the difference of the inventory of the account. The periodic system will be able to tell and determine the inventory that is currently only on hand and will only check occasionally. It will only check and track the inventory temporary and they will be able to adjust when a physical inventory is taken. Most companies that use period system usually only take physical inventory once or twice a year.
When FIFO is being used, the inventory and cost of the goods will be sold at the end of the period, even if either system is being used because the cost will always be first in and first out.
When using the LIFO method, the amounts will differ with the perpetual from the periodic inventory due to the perpetual system withdrawing immediately from the purchases while the periodic system matches the totals from the purchase to the withdrawals.