Question

Northfield Inc., an upscale electronics wholesaler, uses a periodic inventory system to account for the goods available for sale. Northfield’s CFO, Bob Garey, feels that the periodic inventory system that the company uses is too inefficient. The company often runs out of the company’s best - selling merchandise and is unable to fulfill orders. In addition, Northfield shuts down operations twice a year to perform a physical inventory. Bob is considering purchasing a perpetual inventory system module for his accounting software to replace the periodic inventory system.

Discussion question:

1.) A. How would switching from a periodic inventory system to a perpetual inventory system benefit Northfield?

B. Will a perpetual inventory system eliminate the need for Northfield to perform a physical inventory? Please explain your answer.

C. What are the benefits that Bob must consider in retaining that periodic inventory system?

Also, please address the following:

** A manufacturer shipped merchandise to a retailer on a consignment basis. If the merchandise is unsold at the end of the period, in whose inventory should the merchandise be included?

Answer 1

1. A) Perpetual inventory system involves that all changes in the inventory levels are kept on perpetual basis i.e. real time recording of inventory movements. So by switching from periodic inventory system to perpetual inventory system, Northfield shall always have a tab on the real existing inventory level and shall be aware of the inventories that are running low. This will ensure that inventories never go out of stock as purchase order can immediately be placed on seeing that inventory is exhausting and needs replenishing. This will prevent Northfield from losing sales. Also, if inventory levels are maintained using perpetual inventory system that shutting down for physical counting shall not be required as there would be cyclical counting wherein physical counting of part of inventory shall be done on daily basis. Opportunity cost due to shutting down shall be eliminated by perpetual inventory system.

B) No, perpetual inventory system does not eliminate the need for physical counting of inventory. Inventory counting becomes cyclical where part of inventory is counted on daily basis. This means that physical counting is not done away with but only the way in which it is done changes.

C) Benefits of periodic inventory system include lower expenses in terms of salary as no particular person is required to look maintain daily record of inventory and count the inventory everyday. Inventory is looked at, at the end of a particular period so it does not hamper other day to day activities.

For this question, "A manufacturer shipped merchandise to a retailer on a consignment basis. If the merchandise is unsold at the end of the period, in whose inventory should the merchandise be included?", the answer would be -

When inventory is sent on consignment basis, the consignor still remains the owner of it, if the inventory is not sold at the end of the year. It remains the property of the consignor and not the consignee. Therefore it must be recorded in the books of manufacturer and not retailer.