Question

AZO Co. currently uses a periodic inventory system. Mr. Sohaim, the owner, is considering the purchase of a computer system that would make it feasible to switch to a perpetual inventory system. Mr. Hasan is unhappy with the periodic inventory system because it does not provide timely information on inventory levels. Mr. Hasan has noticed on several occasions that the store runs out of good-selling items, while too many poor-selling items are on hand. Mr. Hasan is also concerned about lost sales while a physical inventory is being taken. AZO Co. currently takes a physical inventory twice a year. To minimize distractions, the store is closed on the day inventory is taken. Mr. Hasan believes that closing the store is the only way to get an accurate inventory count.

1. Will switching to a perpetual inventory system strengthen AZO Co.’s control over inventory items?  

2. Will switching to a perpetual inventory system eliminate the need for a physical inventory count?  

3. How IAS-2 is applicable here?

Answer 1

Answer:-

Yes, Switching to perpetual inventory system will strengthen AZO co's control over Inventory items. Because when the periodic inventory system is used, only revenue is recorded each time a sale is made. No entry is made at the time of the sale to record the cost of merchandise sold. At the end of accounting period, a physical inventory is taken to determine the cost of the inventory and cost of merchandise sold. But in perpetual inventory system, entry to record the cost of merchandise sold is made at the time of merchandise sold and this system also tells daily balance with the total cost of inventory held. So if you have daily information about your inventory you can control it in a better way.

But switching to perpetual inventory system cannot eliminate the need for a physical inventory count because to make sure that the quantity of inventory reported in financial statements is accurate. It gives the report of inventory loss or any error due to theft or any other reason.