Triple Creek Hardware Store currently uses a periodic inventory system. Kevin Ca

Question

Triple Creek Hardware Store currently uses a periodic inventory system. Kevin Carlton, the owner, is considering the purchase of a computer system that would make it feasible to switch to a perpetual inventory system.

Kevin is unhappy with the periodic inventory system because it does not provide timely information on inventory levels. Kevin has noticed on several occasions that the store runs out of good-selling items, while too many poor-selling items are on hand.

Kevin is also concerned about lost sales while a physical inventory is being taken. Triple Creek Hardware currently takes a physical inventory twice a year. To minimize distractions, the store is closed on the day inventory is taken. Kevin believes that closing the store is the only way to get an accurate inventory count.

Problem 6-1A Name:    Section:    Score:    0% Key Code:     [Key code here] Instructions                                                                                                                                                                                                                           Answers are entered in the cells with gray backgrounds. Cells with non-gray backgrounds are protected and cannot be edited. An asterisk (*) will appear to the right of an incorrect entry. In part 1, only final inventory cost - Column K - will be graded. 1. Date Purchases Cost of Merchandise Sold Inventory Quantity Unit
Cost Total
Cost Quantity Unit
Cost Total
Cost Quantity Unit
Cost Total
Cost June 1 500 $30.00 $15,000 10 28 30 July 5 10 16 28 Aug. 5 14 25 30 31 Balances 2. JOURNAL Description Debit Credit                         3. Gross profit for the sales period    4. Ending inventory cost    5. Inventory under LIFO would be   

Explanation / Answer

Switching to a perpetual inventory system strengthen Triple Creek Hardware’s control over inventory items. Under the periodic inventory system, the inventory records are not updated continuously as and when they are purchased or sold. Thus making it difficult for the store’s manager to keep track of the inventory as and when a purchase or sale occurs. Under perpetual inventory system, the inventory records are continuously updated with every purchase and sale thereby helping the store’s manager to track the movement of inventory at each point of change in the inventory levels. The continuous monitoring helps the store’s manager to keep track of the quantity, nature and cost of each item of inventory in stores, which in turn helps the company to check the shortage of the good-selling items and to reduce the stock of the poor selling items in inventory.

However, switching to perpetual inventory system will not eliminate the necessity of physical verification of inventory. Physical verification of inventory is a preventive control measure which must be taken once or twice a year irrespective of the method of inventory accounting. The reasons for the differences in the balances of the physical inventory and the balance recorded in the inventory account must be determined so as to find the reason of such differences and to take corrective measures to prevent loss from damage or theft.

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