13. The following characteristics are related to either periodic inventory or pe

Question

13. The following characteristics are related to either periodic inventory or perpetual inventory

systems.

a. purchase of inventory are journalized to an asset account at the time of purchase

b. purchases of inventory are journalized to an expense account at the time of purchase

c. inventory records are constantly updated

d. sales made require a second entry to be journalized to record cost of goods sold

e. bar code scanners that record sales transactions are most often associated with this inventory system

f. physical count of goods on hand at year end is required

Requirement

R1. Identify each characteristic as one of the following:

a. Periodic inventory

b. Perpetual inventory

c. Both periodic and perpetual inventory

d. Neither periodic nor perpetual inventory

Explanation / Answer

Periodic inventory method calculate ending stock at the end of the accounting period, which could be Month to Date or Year to Date, while Perpetual inventory system calculates the ending stock on a continuous basis after each transaction (Purchase or Sell).

Within Retail industry, periodic inventory method used for inventory valuation at the stores, whereas distributer like SuperValu (in US) follows perpetual inventory method to track inventory in their distribution centers.

As a best practice, some of the retail companies are using perpetual accounting method to track inventory available in warehourses and distribution centers.

In an idealistic world, perpetual inventory method can provide the true and real time inventory information, however due to complexities in consolidating all the purchases, sales, shrinkages and other market factors, it is advisable for retail companies to follow periodic accounting method to analyze and review the results before presenting the inventory valuation results to internal and external agencies like Shareholders, Income Tax Authorities, et el.

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