Daniel1985

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.