Explain the differences between periodic and perpetual inventory accounting - Essay Example

First in first out (FIFO) requires that we evaluate the selling stocks on the basis of the cost of stocks purchased first. Thus, the cost of stock sold is determined by their first price. Calculation done according to the FIFO inventory system is shared below. For example, we sold 130 units of goods for $240. Hence, cost of goods sold will be cost of opening balance of 20 units of $200 ($4,000), plus 50 units to $210 ($10,500), plus 60 units of $220 ($13,200). Thus, the cost of goods sold will be $27,700.

Operating profit in this case is defined as $3500 (31,200 – 27,700). Accordingly, stocks include 40 units, which will be cost on the basis of the purchase price of $220 per unit with making total worth of $8,800 (Harris, 2011). Last in first out (LIFO) requires that we evaluate the selling stocks based on the sequence, the reverse order of their arrival. Thus, the cost of stock sold is determined by their last price. Our example remains the same, and we sell a total of 130 units at the price of $240 (31,200).

The cost of goods sold according to LIFO method is 100 units for $220 ($22,000) and 30 units to $210 ($6,300), hence, it is estimated that the products sold are worth $28,300. According to the LIFO method our profit in this case is estimated as $2,900 (31200 - 28 300). However, the remaining goods are estimated to be worth $8200 (Carpenter & Boyle, 2012). The method of average cost is the most simple and it is one of the most common methods used by companies. Suppose a company has a balance of goods at the beginning of the period, which is 20 units, valued at $200 per unit ($4,000).

During the period, it purchased two consignments of 50 units and 100 units at $210 per unit and $220 per unit respectively. However, the company sold 130 units at a price of $240 per unit thus the revenue was $31,200. The cost of goods sold is determined