Final answer:
LIFO inventory costing assumes the most recent items added to inventory are sold first, with different treatments in periodic and perpetual inventory systems. Periodic updates inventory records at intervals, while perpetual does so continuously, both affecting COGS and profit reporting.
Step-by-step explanation:
Costing inventory using last-in, first-out (LIFO) is an inventory valuation method where the most recent goods added to inventory are assumed to be the first ones removed during sales. This can lead to different valuations of inventory and cost of goods sold (COGS) on the balance sheet and income statement, respectively, compared to other methods like FIFO (first-in, first-out).
In a periodic inventory system, updates to the inventory record are made at periodic intervals, such as monthly or annually. Under LIFO, the most recent costs are matched with revenues on the income statement at the end of the period. In contrast, a perpetual inventory system maintains continuous, real-time records of inventory transactions. When using LIFO in a perpetual system, each sale triggers a revaluation of inventory and COGS, removing the most recent costs first.
The different treatments of LIFO under periodic and perpetual systems can lead to variations in reported profits, as the timing of inventory purchases and the price changes can affect COGS. Understanding these differences is crucial when evaluating patterns of costs to determine potential profit and making informed financial decisions.