Question

Because Natalie has had such a successful first few months, she is considering other opportunities to develop her business. One opportunity is to become the exclusive distributor of a line of fine European mixers. The current cost of a mixer is approximately $550, and Natalie would sell each one for $1,100. Natalie comes to you for advice on how to account for these mixers. Each appliance has a serial number and can be easily identified.

Please answer the following questions.

1. "Would you consider these mixers to be inventory? Or, should they be classified as supplies or equipment?"

2.   “I’ve learned a little about keeping track of inventory using both the perpetual and the periodic systems of accounting for inventory. Which system do you think is better? Which one would you recommend for the type of inventory that I want to sell?”

3.   “How often do I need to count inventory if I maintain it using the perpetual system? Do I need to count inventory at all?”

Answer 1

1. The mixers should be considered as inventories. Inventories are the items which are sold to customers in the normal course of business. They are part of operating activities of the firm and part of the current assets. Supplies are items for use in business like factory use or admin purpose and equipment is long term assets held for the purpose of use in business and generation of turnover. Hence mixers qualify as inventories.

2. Perpetual inventory system is better than periodic inventory system

· Perpetual inventory system records purchase and sale after each and every transaction. Periodic inventory system records the transaction at the end of the month

· Perpetual inventory system needs regular stock taking to match with system stock. Periodic inventory system require stock taking at the end of the month

· Perpetual inventory system gives better control over the inventory compared to the periodic inventory system

Perpetual inventory system is recommended with FIFO (First in First out) method for the type of inventory in the given situation

3. Inventories should be counted on a daily basis as a matter of good practice and control over the inventory. The inventories should be matched with system stock for discrepancy if any and holding accountable and responsible the employees in charge of inventory. Maintaining control over inventory is an important part of internal control in a firm.