Under the perpetual inventory system using LIFO, how is Cost of Goods Sold calculated?

In a perpetual inventory system utilizing the Last-In, First-Out (LIFO) method, Cost of Goods Sold (COGS) is calculated based on the most recently purchased inventory items. This means that when inventory is sold, the cost assigned to those goods comes from the latest purchases rather than older stock.

This approach reflects the idea that the latest inventory reflects current costs, which can be particularly relevant for businesses facing rising prices. As a result, during times of inflation, LIFO can lead to higher COGS and lower taxable income compared to First-In, First-Out (FIFO) or average cost methods.

The other calculation methods mentioned involve different approaches; for instance, the first items purchased would follow FIFO, averaging all items would use the average cost method, and using only current inventory values does not accurately reflect the cost flow assumptions established by LIFO or FIFO methods. Thus, the distinctive characteristic of LIFO clearly supports the choice of using the last items purchased to compute COGS.