Inventory: Perpetual, Periodic and FIFO (SACE Stage 2 Accounting)
“Record inventory under perpetual and periodic systems and value closing inventory using the FIFO cost flow”
Under the perpetual system the inventory account is updated at every purchase and sale, so cost of goods sold is recorded as each sale happens. Under the periodic system inventory is counted only at period end and cost of goods sold is calculated as opening inventory plus purchases minus closing inventory. FIFO assumes the first units bought are the first sold.
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What this dot point is asking
You need to record inventory under both systems, value closing inventory using first-in-first-out, and explain how the choice affects profit.
Perpetual versus periodic
Perpetual: a continuous record. Each purchase debits Inventory; each sale records two entries, one for the sale and one transferring cost from Inventory to Cost of goods sold. The inventory balance is always current. Periodic: purchases go to a Purchases account, no cost entry is made on sale, and inventory and cost of goods sold are determined only by a stocktake at period end.
Cost of goods sold under the periodic system uses the inventory equation:
FIFO cost flow
When units are bought at different prices, an assumption is needed about which cost leaves first. First-in-first-out assigns the oldest costs to cost of goods sold and leaves the newest costs in closing inventory. In a period of rising prices this gives a lower cost of goods sold and a higher closing inventory, so reported profit is higher.
Movements in one product
| Date | Detail | Units | Cost each |
|---|---|---|---|
| 1 May | Opening | 100 | 10 |
| 8 May | Purchase | 150 | 12 |
| 20 May | Sale | 180 |
Two cost layers are on hand before the sale: 100 units bought at $10 and 150 units bought at $12. FIFO sends the oldest cost out first.
Step 1: Find total units available and closing units
Add the opening stock and the purchase to get what was available, then subtract the sale:
Step 2: Calculate FIFO cost of goods sold
Under FIFO the earliest units are sold first. The sale of 180 units draws down the oldest layer completely before touching the newer one:
- First 100 units at $10: .
- Next 80 units at $12: .
Step 3: Value closing inventory
The 70 units remaining all come from the most recent purchase, because the older layer was exhausted first:
Step 4: Reconcile to confirm the figures are correct
Total cost available should equal COGS plus closing inventory:
Final answer: COGS is $1,960 and closing inventory is $840.
The inventory card and recording on the perpetual system
On the perpetual system, each inventory item is tracked on its own inventory card with three columns of activity: purchases (in), cost of goods sold (out) and the running balance. Under FIFO the balance column often holds two or more cost layers at once, and a sale must draw down the oldest layer first before touching newer layers, which is exactly what SACE inventory-card questions test. The journal entries that sit behind the card are: on purchase, Dr Inventory, Dr GST paid, Cr Creditor or Cash; on a credit sale, two entries are made, first Dr Debtor, Cr Sales, Cr GST collected at the selling price, and second Dr Cost of goods sold, Cr Inventory at the FIFO cost. Recording the cost entry at the same time as the sale is what makes the system "perpetual".
Inventory discrepancies and the lower of cost and net realisable value
A physical stocktake will sometimes reveal fewer units than the card shows, because of theft, breakage or error. The shortfall is an inventory discrepancy (a stock loss): it is written out of the Inventory account (Dr Inventory loss or COGS adjustment, Cr Inventory) and disclosed, rather than hidden inside ordinary cost of goods sold, so the cause can be investigated. SACE also expects you to apply the lower of cost and net realisable value rule at balance day: if the amount the inventory can be sold for (less selling costs) has fallen below its FIFO cost, it is written down to that lower figure, applying prudence so that assets are not overstated.
Why the system and flow matter
The closing inventory figure feeds straight into cost of goods sold and therefore gross profit, and it appears as a current asset. A higher closing inventory value lowers cost of goods sold and raises profit. The perpetual system also supports better control because shortages show up as a difference between the recorded balance and the physical count.
Applying FIFO to the wrong end of the queue. FIFO sends the earliest costs to cost of goods sold, so closing inventory is valued at the latest prices, not the earliest. Students often value closing inventory at the oldest cost, which is the result of last-in-first-out, a different assumption not used here.
Exam-style questions
Questions in the style of SACE Board exam questions on this dot point, each with a worked answer. They are written by ExamExplained unless tagged "Past paper"; the year shows the paper a question is modelled on.
2023 SACE Stage 2-style7 marksComplete the inventory card for Starlit Nights using the first-in, first-out method and recording any inventory discrepancy. (8 bags purchased at $230, 3 returned to the supplier, 9 bags bought at $290, 6 then 5 sold, 1 sales return, and a final stocktake of 3 bags on hand.)Show worked answer →
Under perpetual FIFO you update the card after every movement and always issue the oldest cost first.
- Purchase 8 at $230 -> balance 5 at $230 (after the 3 returned to supplier at $230).
- Purchase 9 at $290 -> balance shows two cost layers: 5 at $230 and 9 at $290.
- Sale of 6: issue the 5 oldest at $230 ($1,150) then 1 at $290 ($290), COGS $1,440. Balance 8 at $290.
- Sale of 5 at $290 ($1,450) -> balance 3 at $290.
- Sales return of 1: the customer returns 1 unit, brought back in at its $290 cost -> balance 4 at $290.
- Stocktake shows only 3 on hand, so there is an inventory discrepancy (loss) of 1 unit at 290. Write this out of inventory: balance 3 at 870.
Markers reward issuing costs in FIFO order, correct running balances and identifying and recording the stock loss separately rather than burying it in COGS.
2024 SACE Stage 2-style2 marksCalculate the inventory turnover ratio for the month of June 2024 for the solar panels, given monthly cost of goods sold and average inventory from the FIFO inventory card.Show worked answer →
Inventory turnover = cost of goods sold / average inventory, measured in times.
From the FIFO card, total the cost of goods sold for June (the cost of the units issued on the sales dates, net of the sales return) to get monthly COGS. Average inventory = (opening inventory + closing inventory) / 2 using the dollar balances on the card (opening $70,000 and the closing balance after the stocktake).
Divide: turnover = COGS / average inventory, expressed as "x times". A higher figure means stock is sold and replaced more often.
Markers want the formula stated, the correct COGS and average used, and the answer labelled in times. Note this monthly figure is not comparable with an annual turnover unless it is scaled, which is exactly the trap the next part of the question tests.
2022 SACE Stage 2-style2 marksEspress Yourself uses both the first-in, first-out method and the specific-identification method. Identify one inventory item for which the business would use the specific-identification method of valuing inventory, and give a reason for your answer.Show worked answer →
Choose a high-value, low-volume, individually identifiable item, for example the coffee machines (or coffee grinders).
Reason: specific identification tracks the actual cost of each individual unit. It suits items that are expensive, sold in small numbers and easy to identify separately (for example by serial number), so the exact cost of the unit sold can be matched to its sale. This gives a precise cost of goods sold and closing inventory value.
By contrast, low-cost, high-volume, interchangeable items such as filters or reusable cups are better suited to FIFO, because tracking each unit individually would not be worth the effort (the materiality and cost-benefit ideas). Markers want a sensible item plus a reason that links to the item being high-value and individually identifiable.
Practise this
Sources & how we know this
- Stage 2 Accounting subject outline (2025 onwards) — SACE Board
- Stage 2 Accounting: external assessment — SACE Board