Question

Yourinstructor discussed perpetual and periodic inventory systemsin the walkthroughs of the Chapters 5 and 6 PowerPoint slides. Given your instructor’s advice to account for SCL’sinventory in the Purchases account rather than in the Inventory account, you plan to indicate which type of inventory system SCL has been using. You havealsodecided to review your notes and briefly describethat system as well asits majoradvantage and disadvantage

Answer 1

Accounting for the SCL's Inventory in the Purchase Account indicates that SCL has been using the Periodic Inventory System.

Under the Periodic Inventory System the level of inventory and the cost of goods sold are measured by the physical count.The Inventory records are updated at periodic intervals. The inventory and the cost of goods sold account are updated at the end of every set period say- a month, a quarter or a year. Most companies following a periodic inventory system do not have the inventory accounts or the cost of goods sold figures as much exact or accurate. All the merchandise purchases are recorded under the Purchases Account.

Also, all the business operations are stopped during valuation.

Advantages-

1) Applicable for all business organisations either large or small dealing in any variety of goods.

2) All the normal activities of the business are undisturbed as the stock count is done at the end of the period.

3) Quantity of stock of merchandise is reliable as the stock taking is done on a particular date.

Disadvantages-

1) Normal activities of the business are suspended because of the physical counting of the merchandise stock on a particular date.

2) Chances of fraud and forgery as the continuous control over the merchandise is absent.

3) Weak stock control device always give a chance to employees to be corrupt.