Final answer:
Companies must adjust their perpetual inventory system outputs for LIFO at the end of each period, applying the LIFO conformity rule and potentially conducting a LIFO layer liquidation analysis to ensure accurate financial reporting.
Step-by-step explanation:
Companies that wish to report under the Last-In, First-Out (LIFO) inventory costing method need to make adjustments to the outputs of their perpetual inventory system at the end of each accounting period. This involves a process commonly referred to as the LIFO conformity rule, which states that if a company uses LIFO for tax reporting purposes, it must also use LIFO for financial reporting. As perpetual inventory systems typically record inventory at current costs, a company must calculate the cost of goods sold and the value of ending inventory under the LIFO assumption as part of its year-end procedures.
This often requires a LIFO layer liquidation analysis to determine if any layers of inventory have been liquidated, which could result in a higher taxable income. To maintain LIFO reporting, companies must also apply price indexes or update their cost layers to reflect the current purchase costs corresponding to the end-of-the-year inventory composition. This ensures that the inventory valuation reflects the cost of the most recent purchases being sold first.