Chapter8: Inventories: Measurement
A Comparison of the Perpetual and Periodic Inventory Systems
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.
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.