Permanent vs Periodic Inventory

CFA Level I
#1

Could someone explain me the logic behind that system? I never take the good answer…

#2

I think that you mean “perpetual”, not “permanent”.

In a periodic inventory system, when you buy merchandise you put it into an account called Purchases ; it doesn’t get moved from Purchases to Inventory until the end of the year. The big implication is that if you’re using LIFO (or average cost), you can, in effect, sell inventory before you buy it.

In a perpetual inventory system, when you buy merchandise you put into Inventory immediately. The big implication is that if you’re using LIFO (or average cost), you cannot, in effect, sell inventory before you buy it.

Note, therefore, that LIFO and average cost Inventory and COGS can be different under a perpetual inventory system than under a periodic inventory system.

FIFO Inventory and COGS are the same under both.

#3

Are you referring to periodic versus perpetual inventory systems – accounting for inventory? Once I have clarification, I will post a response.

#4

Beat me to it. Good work.

#5

This is a very good explanation! Thanks…!!!

I have two more… I don’t understand when in the questions I see something related LIFO liquidation… can you explain me?

And the last question… relater to perpetual inventory system and specific determination system. First of all, what is specific determination??? and I don’t understand these question…

Wich inventory method best matches the actual historical cost of the inventory sold with their physical flow if a company is using perpetual inventory system?

a) FIFO

b)LIFO

c) specific determination

And the answer is C… I don’t understand why. Thanks in advance

#6

I’ve never heard the phrase “specific determination”, but clearly they mean “specific identification”: each inventory item has a cost associated with it, and when each item is sold its cost is included in COGS. This is commonly used with unique or high-priced inventory items: precious gems, automobiles, and so on.

Whether you use a perpetual inventory system or not, specific identification best matches the physical flow of the inventory: when you buy item A its cost goes into inventory, and when you sell item A its cost comes out of inventory.