Periodic FIFO method definition
/What is the Periodic FIFO Method?
The periodic FIFO method assumes that the oldest inventory costs are assigned to goods sold first, while the newest costs remain in ending inventory. Under a periodic system, cost of goods sold and ending inventory are calculated at the end of the accounting period rather than after each sale. FIFO is applied to the total units available for sale, regardless of the actual physical movement of inventory during the period.
How Does Periodic FIFO Work?
In order to operate a periodic FIFO system, you must complete the following sequence of activities:
Complete a physical count of the inventory.
Derive the ending inventory valuation, on the assumption that the ending inventory only includes the most recently-acquired items (and their costs).
Subtract the cost of your ending inventory from the cost of goods available for sale, which the cost of your beginning inventory, plus the cost of all purchases made during the period. This results in your cost of goods sold figure for the period.
Example of Periodic FIFO
A company sells coffee mugs and uses a periodic inventory system with FIFO to track costs. During January, the following purchases and sales occurred:
January 5: Purchased 100 mugs at $5 each (Total: $500).
January 12: Purchased 150 mugs at $6 each (Total: $900).
January 20: Sold 200 mugs.
Calculating Cost of Goods Sold (COGS) Using Periodic FIFO:
Since FIFO assumes the oldest inventory is sold first, we allocate the costs as follows:
From January 5 Purchase: 100 mugs at $5 each = $500 (all sold).
From January 12 Purchase: 100 mugs at $6 each = $600 (200 mugs sold in total, so 100 from this batch).
Therefore, the total cost of goods sold is: $500 + $600 = $1,100
Ending Inventory:
The remaining 50 mugs from the January 12 purchase at $6 each = $300.
In this example, the company determined COGS and ending inventory based on the oldest costs first, without adjusting inventory continuously—demonstrating how periodic FIFO works.
Accounting for Periodic FIFO
Under the periodic FIFO method, sales are recorded when they occur, but the cost of goods sold is updated later, when there is a physical inventory count. This means that you will not have a reliable gross margin figure until the physical count can be completed.
Periodic FIFO FAQs
Does periodic FIFO comply with U.S. GAAP and IFRS?
Yes. Periodic FIFO is permitted under U.S. GAAP and IFRS as an acceptable inventory cost flow assumption. The method must be applied consistently and supported by accurate records of purchases and quantities. Appropriate disclosure of the inventory valuation method is also required.