Question

Does the Foot video in Interact2 Resources show Periodic or Perpetual Inventory? How can you tell? Explain the essential differences between perpetual and periodic inventory systems. Give your own examples of products/situations suited to each.

Answer 1

Periodic and perpetual inventory systems are different methods used to track the quantity of goods on hand. The more sophisticated of the two is the perpetual system, but it requires much more record keeping to maintain.

The periodic system relies upon an occasional physical count of the inventory to determine the ending inventory balance and the cost of goods sold, while the perpetual system keeps continual track of inventory balances.The periodic inventory system allows a company to record sales of merchandise in a special account. When merchandise gets sold, the company records the revenue but does not record a cost of goods sold (CoGS) entry.

For example a company, a retailer of high-end fashion products uses periodic system of inventory -

Inventory balance on January 1, 2016: $600,000
Purchases made during the year 2016: $1,200,000
Inventory balance on December 31, 2016: $500,000

So, the COGS can be computed manuaaly as the company uses a periodic inventory system

Cost of goods sold (COGS) = Beginning inventory + Purchases – Closing inventory
= $600,000 + $1,200,000 – $500,000
= $1,300,000

Perpetual Inventory? System -

The introduction of computers greatly advanced the use of the the perpetual inventory system. Perpetual inventory records each sale of merchandise and places an entry in the company’s inventory account. This system also immediately reduces sold inventory from stock and adds inventory back to stock when a customer returns merchandise.

For example, at a supermarkets using the perpetual inventory system, when products with barcodes are scanned and paid for, the system automatically updates inventory levels in a database.