What are the key differences between perpetual and periodic inventory systems?
My CFA Level I study materials mention perpetual and periodic inventory systems but don't go deep into how COGS and ending inventory differ between them when using FIFO, LIFO, or weighted average. Can someone explain the mechanics and when the two systems produce different results?
This is a foundational FRA concept. The two systems differ in when inventory records are updated and how cost of goods sold (COGS) is computed.
Perpetual System: Inventory is updated continuously — every purchase and every sale is recorded in real time. COGS is calculated at the time of each sale.
Periodic System: Inventory is only updated at the end of the period. COGS is computed as a plug figure:
COGS = Beginning Inventory + Purchases - Ending Inventory
When do results differ?
Under FIFO, both systems give identical results because the oldest costs are always assigned first regardless of timing.
Under LIFO and weighted average, the systems can produce different COGS and ending inventory because the cost layers or average costs change depending on when calculations are performed.
Example — LIFO difference:
Crestview Hardware has the following transactions:
- Jan 1: Beginning inventory — 100 units at $10
- Mar 15: Purchase — 200 units at $12
- Jun 1: Sold 150 units
- Sep 20: Purchase — 100 units at $14
- Nov 10: Sold 120 units
Perpetual LIFO:
- Jun 1 sale (150 units): Take 150 from the Mar 15 layer at 1,800
- Nov 10 sale (120 units): Take 100 from Sep 20 at 12 → COGS = 240 = $1,640
- Total COGS = $3,440
Periodic LIFO:
- All 270 units sold at year-end allocated from newest: 100 at 12 = 2,040 = $3,440
- In this case the totals happen to match, but with different purchase/sale timing patterns, they often diverge.
Weighted Average difference:
- Perpetual: A new moving average is recalculated after every purchase
- Periodic: One weighted average is computed at year-end using all purchases
Summary table:
| Feature | Perpetual | Periodic |
|---|---|---|
| Updates | Continuous | End of period |
| COGS calculation | At each sale | End of period (plug) |
| FIFO results | Same | Same |
| LIFO results | May differ | May differ |
| Weighted avg results | Moving average | Period-end average |
| Physical count needed? | Still done (shrinkage) | Essential |
For the CFA exam, focus on understanding that FIFO always matches and that LIFO/weighted average can differ between the two systems.
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