Final answer:
In a perpetual inventory system, FIFO is used to manage inventory by assuming the oldest stock is sold first, which is crucial for items with limited shelf life or that become obsolete quickly. It tracks inventory and cost of goods sold in real-time, aiding in financial reporting, purchasing, and stock management. An example of its use is in a grocery store, where the system updates inventory with every sale, deducting the oldest items first.
Step-by-step explanation:
Within a perpetual inventory system, the FIFO (First-In, First-Out) method can be employed to manage inventory. This method assumes that the goods purchased or produced first are sold first, and the newest inventory remains unsold. In a perpetual inventory system, FIFO is particularly useful for businesses that deal with products that have a limited shelf life or are subject to obsolescence, such as food or technology products. The perpetual system keeps continuous records of inventory and cost of goods sold, and FIFO helps in accurately tracking the cost flow corresponding to the actual physical flow of goods. This method assists in keeping track of current inventory levels on a real-time basis, which is important for financial reporting, making informed purchasing decisions, and stock management.
For example, a grocery store that uses a perpetual inventory system with FIFO will continually update its inventory records every time a sale is made. When it sells a carton of milk, the system will deduct the oldest milk stock from the inventory first. For accounting purposes, the cost associated with the oldest inventory is recorded as the cost of goods sold, ensuring that the cost reported matches the actual physical outflow of products.