Question

Is it necessary to do a physical count of inventory if the company is using a perpetual system? Why or why not? What sort of company would likely use a perpetual system? What sort of company would likely use a periodic system? (Provide specific examples).

Answer 1

Retail businesses maintain an inventory of finished goods for sale and operating supplies to conduct business. A manufacturer also maintains an inventory of finished goods and supplies, but also keeps a store of the raw materials used to manufacture finished goods. Inventories represent a cost to the organization and may be the largest asset the company owns. Companies strive to maintain the lowest level of materials in inventory while still meeting customer demand and orders. To exercise control over inventory levels, accurate inventory records are essential. Counting inventory is necessary in all management systems, but the frequency can vary.

  

Perpetual Inventory Systems

A perpetual system updates inventory records as the company uses raw materials or sells products to customers. For example, in a retail store when customers purchase a product, the cash register or computer system automatically deducts the product from inventory records. In a manufacturing organization, a work order system subtracts raw materials from the inventory records when the production department begins the order. The perpetual system deducts finished product from the system when customer orders ship from the facility. Companies may use a bar code system to update the inventory records or rely on employees to manually enter transactions.

its why or why not ?

Perpetual systems offer companies inventory records that update in real time. Purchasing and planning can rely on the inventory records to make decisions regarding material purchases and work scheduling. The business is not required to shut down at the end of each month to physically count the inventory.

  Companies that use a perpetual system may still conduct an annual physical inventory. In the periodic inventory system, physical counts are used to determine the amount of goods sold. In the perpetual system, a year-end physical inventory validates the inventory records.

What sort of company would likely use a perpetual system ?

I would say mainly businesses that run trading and distribution, or drop shipping models. For these businesses, inventory is constantly moving in or out, and returns and exchanges are happening all the time. It is impossible to handle everything at once unless you are a computer (which is exactly what you’ll need).

A perpetual inventory system solves that pain point for many companies of all sizes because not only you’ll take that headache out for your team, you’ll also be saving a lot of time which you can then use to do more productive stuff (like sales, or customer support).

A good system as a yardstick is EMERGE App, a perpetual inventory solution that tracks your goods in real time and provides on-demand data. It even prompts you to purchase stocks when low or when you have a drop shipping order coming in. It’s based on a freemium model, so if you’re just a one-man show it’s forever free for you.

What sort of company would likely use a periodic system? With Examples.

Periodic inventory is a form of inventory tracking that only requires stock counts at certain times of the year. The count is performed once every quarter or annually and involves counting every piece of inventory and recording the cost. Companies that use this method are not aware of the actual inventory during most of the year. An accurate inventory is important because the cost of the inventory is listed on financial statements, such as the balance sheet.

Clothing stores use periodic inventory because they have a high volume of sales with moderately priced goods. According to Entrepreneur magazine, the average clothing retailer sells $1.7 million worth of merchandise with just 17 employees. This inventory method helps them record the sales without the hassle of constantly updating the cost of each item sold. Since returns can change inventory every day, companies wait until the end of a period to update inventory records.

Grocery stores stock large amounts of small goods. According to the Food Marketing Institute, the average grocery store sells 45,000 items every week, with sales of just over $300,000 per store. Grocery stores save on labor costs by making periodic adjustments of inventory. Saving time is especially important for small and specialty stores, which generally aren’t open 24 hours like large chains. The Food Marketing Institute also reports that grocery stores’ inventory counts tend to suffer due to shoplifting. A periodic inventory helps them improve the accuracy of their inventory records.

Discount retailers, such as Wal-Mart, sell a large selection of goods in warehouse-sized buildings. These companies have automated systems that can handle the constant updating, but many still use periodic inventory. According to the book "Principles of Accounting," bar codes help companies keep track of actual inventory in real-time, but they use periodic inventory because it is less time-consuming and more convenient for the financial department.