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Chapter8: Inventories: Measurement

A Comparison of the Perpetual and Periodic Inventory Systems

Beginning inventory plus net purchases during the period is the cost of goods available for sale. The main difference between a perpetual and a periodic system is that the periodic system allocates cost of goods available for sale between ending inventory and cost of goods sold (periodically) at the end of the period. In contrast, the perpetual system performs this allocation by decreasing inventory and increasing cost of goods sold (perpetually) each time goods are sold.

 

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   The impact on the financial statements of choosing one system over the other generally is not significant. The choice between the two approaches usually is motivated by management control considerations as well as the comparative costs of implementation. Perpetual systems can provide more information about the dollar amounts of inventory levels on a continuous basis. They also facilitate the preparation of interim financial statements by providing fairly accurate information without the necessity of a physical count of inventory.

   On the other hand, a perpetual system may be more expensive to implement than a periodic system. This is particularly true for inventories consisting of large numbers of low-cost items. Perpetual systems are more workable with inventories of high-cost items such as construction equipment or automobiles. However, with the help of computers and electronic sales devices such as cash register scanners, the perpetual inventory system is now available to many small businesses that previously could not afford them and is economically feasible for a broader range of inventory items than before.

 

A perpetual system provides more timely information but generally is more costly.

   The periodic system is less costly to implement during the period but requires a physical count before ending inventory and cost of goods sold can be determined. This makes the preparation of interim financial statements more costly unless an inventory estimation technique is used.2 And, perhaps most importantly, the inventory monitoring features provided by a perpetual system are not available. However, it is important to remember that a perpetual system involves the tracking of both inventory quantities and costs. Many companies that determine costs only periodically employ systems to constantly monitor inventory quantities.




2In Chapter 9 we discuss inventory estimation techniques that avoid the necessity of a physical count to determine ending inventory and cost of goods sold.

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