Inventory Management
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Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Managing inventory means balancing two costs: running out and disappointing customers, or holding too much and paying for storage you don't need. Before you can manage it well, you need to know how your company actually tracks it — and there are two systems.
What is the periodic inventory method?
Under the periodic method, inventory is only counted once per period. Cost of goods sold isn't recorded transaction-by-transaction at all — instead, it's calculated at period end as a plug:
Ending inventory comes from a physical count at period end. Until that count happens, the company doesn't have an up-to-date number for exactly how much inventory it has on hand.
What is the perpetual inventory method?
Under the perpetual method, inventory is tracked continually. Every sale updates the inventory account and records cost of goods sold in real time, so the company always knows exactly how much inventory it has on hand, at any point in time — no physical count required to find out.
Perpetual gives you real-time visibility; periodic gives you simplicity. This is also why the weighted-average costing method pairs with periodic (one calculation at period end) while moving-average pairs with perpetual (recalculated continuously).
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 95 on FAR. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.