Inventory question

Can anybody explain to me why it is that a periodic inventory system is likely to have a higher COGS than a perpetual inventory system?

Perpetual vs. Periodic only makes a difference using LIFO or AVCO. We’ll assume LIFO here cause thats a little easier to illustrate…a highly simplified example that should illustrate why periodic has higher COGS under assuming rising prices. Assume inventory costs for each quarter are: Q1 Cost: $35 Q2 Cost: $40 Q3 Cost: $45 Q4 Cost: $50 Say that the Company bought 1 piece of inventory each quarter and only made 1 sale during the year in Q2. Using perpetual, at the end of Q2 the Company would have 2 pieces of inventory, 1 at $35 and 1 at $40. Since they use LIFO, they would recognize COGS of $40 (the last purchase). Under the periodic method, the Company would wait until the end of the year (Q4) before figuring out COGS. At the end of Q4, they would have 1 piece of inventory at $35, 40, 45, and 50. They’d use the last piece purchase as COGS, or $50.

+1. I was running into some troubles getting the jist of this topic… I found the book to over complicate the issue.

great example brian thanks

and FIFO it doesn’t matter which method why…?

FIFO puts the same units in COGS (the first ones) regardless of what system you’re using. The reason COGS changes with LIFO is that your definition of “last in” is dependent on the time period you’re looking at. “First in” (ie FIFO) is the same regardless of whether you’re looking at one quarter, one year, etc etc.

very nicely put. Thanks

Brian and kiakaha: You guys are going to ace this test!!