Question

Do car dealerships use a perpedual or periodic inventory system. Please elaborate on the reasons why one is more preferable over the other.

Answer 1

Perpetual Inventory

Under a perpetual inventory system, inventory accounts and databases are updated automatically each time a product is received or sold. Perpetual inventory systems rely on information technology to instantly track inventory movement and send electronic updates across any distance to central databases. As an example, a retail store may use Radio Frequency Identification (RFID) tag readers to scan inventory items at the point of sale. A Point-of-Sale (POS) software system on the cash register/computer can capture and store information on exactly which item was sold, then send the information over the Internet to the company's central accounting database in the regional or national corporate office. This process can be automatically repeated for every single transaction that takes place during the day.

Periodic Inventory

Periodic inventory systems use regular and random inventory audits to update inventory tracking information. Rather than relying on technology to update databases each time an item is sold, managers must physically count inventory in storage from time to time, comparing inventory on hand against sales and receipt data from the sales and purchasing departments to determine if any discrepancies exist.

Perpectual inventory system is more preferable than Periodic inventory system.

Why perpetual inventory system is more preferable ?

With a perpetual inventory system is able to provide better control over a company's inventories than a periodic system. In a perpetual system the inventory records show the quantities that should be on hand, which means that the company can go and do a physical count of the goods to see if the amount of goods match their records. By doing a physical inventory a company is able to see if a shortage has occured and if it has then the company can investigate and fix the problem.

A perpetual inventory system is popular today because all phases of creating and supplying a product are much more advanced and the customer has grown used to this supply system. In modern western cultures, people are used to being able to purchase and obtain most any item they wish whereas in the 1960’s the time it took to produce and supply a product was much slower and people were in the habit of placing an order and waiting for it to be delivered.

Physical inventories are accomplished to provide solid and undisputable evidence of inventory levels. This evidence can serve to bolster customer and stakeholder confidence as well as identify and correct any errors within an inventory system. Fraudulent activities such as falsifying inventories, misleading auditors, or claiming that inventory is owned or is in transit when in actuality it does not’t exist, are sought to bolster stock prices, company bonuses, and financial statement numbers. A physical inventory will help identify such behavior before it can do lasting damage to a company’s reputation.