Key Terms
How it works
Calculate a new average cost per unit after every purchase. Apply that average cost to units sold.
Best for
High-value, customized, or highly differentiated items.
Examples
Vehicles, jewelry, custom equipment.
Not practical for
High-volume, low-difference goods like screws or paper clips — too cumbersome to track individually.
IFRS NOTE
IFRS prohibits LIFO. Roughly 35-40% of US companies use LIFO.
Special rule
If a company uses LIFO for tax purposes, it must also use LIFO for its financial statements. You cannot use LIFO on your
Formula
Average Inventory divided by Average Daily COGS
Under periodic AVG
Calculate one average for the whole period at the end.
Under perpetual AVG
Recalculate a new average after every purchase (called a moving average). Apply that new average to the next sale.
You can also work it in reverse
Goods available for sale - COGS = Ending inventory
FIFO periodic
1. List all lots purchased (beginning inventory + purchases) oldest first 2.
LIFO periodic
1. List all lots purchased oldest first 2.
AVG periodic
1. Calculate total cost of all goods available for sale 2.
Inventory Credit
Accounts Payable (or Cash)
FIFO perpetual
Works the same as FIFO periodic — always pull from the oldest available lot. Results are identical to FIFO periodic.