What is Perpetual FIFO?

Perpetual FIFO is a cost flow tracking system under which the first unit of inventory acquired is presumed to be the first unit consumed or sold. In addition, this cost flow occurs under a perpetual inventory system, where inventory inflows and outflows are recorded in the inventory records as soon as transactions occur. There is no difference between the resulting charge to the cost of goods sold if a perpetual inventory system or a periodic inventory system is used.

Perpetual FIFO is one of the most common cost flow tracking systems in use today, because it accurately reflects the actual flow of goods through a business.

Impact of Perpetual FIFO

In an inflationary environment, perpetual FIFO will result in the lowest possible cost of goods sold and the highest possible ending inventory valuation. This is because the oldest items in inventory were presumably purchased at the lowest prices, and are used first. This means that the cheapest items in stock are charged to expense first, while the newest and most expensive items are retained in stock. The net effect is that your business will maximize the amount of its reported profits. The reverse impact occurs in a deflationary environment (though this is a relatively rare event).