What is the Periodic FIFO Method?

Periodic FIFO is a cost flow tracking system that is used within a periodic inventory system. Under a periodic system, the ending inventory balance is only updated when there is a physical inventory count, which only occur infrequently, such as at the end of a month, quarter, or year. At that time, if the physical reveals that units have been consumed, then the costs of the oldest units are removed from the cost layering database for the inventory and charged to the cost of goods sold. This means that the costs of only the most recently acquired inventory still remain in the inventory. This assignment of costs can be substantially delayed if there has not been a physical inventory count for a number of accounting periods.

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.

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.