Question

In: Accounting

Is it necessary to do a physical count of inventory if the company is using a...

Is it necessary to do a physical count of inventory if the company is using a perpetual system? Why or why not? What sort of company would likely use a perpetual system? What sort of company would likely use a periodic system? (Provide specific examples).

Please provide one main post and two additional peer interactions. Your main post must be a minimum of 200 words

Solutions

Expert Solution

Perpetual Inventory system and requirement of physical count

Under the perpetual inventory system, an entity continually updates its inventory records to account for additions to and subtractions from inventory for such activities as:

  1. Received Inventory
  2. Issue to Production
  3. Items transfer from one location to another
  4. Items Scrapped

Thus, a perpetual inventory system has the advantages of providing up-to-date inventory balance. However Physical count is necessary to determine actual balance and book balance are same, is there any unrecorded transaction, and is there any theft or pilferage. To adjust these Physical count is necessary in perpetual inventory system.

The perpetual inventory system is a requirement for any organization planning to install a material requirements planning system. Basically manufacturing company whose production cycle is getting complete same day are following perpetual inventory system. Kitchen appliances industry are one of the best example, who generally follow perpetual inventory system.

Periodic Inventory system and requirement of physical count

The periodic inventory system only updates the ending inventory balance in the general ledger when you conduct a physical inventory count. Since physical inventory counts are time-consuming, few companies do them more than once a quarter or half yearly or yearly basis. In the meantime, the inventory account in the accounting system continues to show the cost of the inventory that was recorded as of the last physical inventory count.

Under the periodic inventory system, all purchases made between physical inventory counts are recorded in a purchases account. When a physical inventory count is done, the balance in the purchases account is then shifted into the inventory account, which in turn is adjusted to match the cost of the ending inventory.

The periodic inventory system is most useful for smaller businesses that maintain minimal amounts of inventory. For them, a physical inventory count is easy to complete, and they can estimate cost of goods sold figures for interim periods.

Example

The calculation of the cost of goods sold under the periodic inventory system is:

Beginning inventory + Purchases = Cost of goods available for sale

Cost of goods available for sale – Ending inventory = Cost of goods sold

For example, Stovekraft Corporation has beginning inventory of $5,000, has paid $17,000 for purchases, and its physical inventory count reveals an ending inventory cost of $9,000. The calculation of its cost of goods sold is:

  1. Opening Inventory          =             $ 10,000
  2. Purchases                           =             $17,000
  3. Closing Inventory             =             $9,000
  4. Cost of Goods Sold          =             $10,000+$17,000-$9,000

=             $18,000

Feel free to ask any further clarification.


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