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Chapter 8: Question 3Q (page 421)

What is the difference between a perpetual inventory and a physical inventory? If a company maintains a perpetual inventory, should its physical inventory at any date be equal to the amount indicated by the perpetual inventory records? Why?

Short Answer

Expert verified

Perpetual and periodic inventory are the two inventory systems for controlling inventory. The balance under these two inventories would often differ.

Step by step solution

01

Difference between the perpetual inventory and physical inventory

Basis of difference

Perpetual Inventory

Periodic Inventory

1. Definition

A perpetual inventory is a process of keeping track of inventories continuously.

Periodic inventory keeps checking on inventory after a period like annually.

2. Accounting

Under perpetual inventory, the inventory account is maintained for all purchases and issues.

Under periodic inventory, only the purchase account is maintained.

3. COGS

The cost of goods sold is recorded for each sale.

The cost of goods sold is recorded only at the end of the period.

4. Ending inventory

Ending inventory is the balance of the inventory account.

Ending inventory is determined by physical inspection.

02

Difference in amount under two inventory systems

Under perpetual inventory, inventory is updated after every inventory or inventory-related transaction. But in reality, inventory may be lost due to spoilage, theft, or breakage.

On physical inspection, such loss is identified. So there remains a difference between the perpetual and physical inventory, which is adjusted through the “inventory over and short” account.

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Most popular questions from this chapter

Question:Stallman Company took a physical inventory on December 31 and determined that goods costing \(200,000 were on hand. Not included in the physical count were \)25,000 of goods purchased from Pelzer Corporation, f.o.b. shipping point, and \(22,000 of goods sold to Alvarez Company for \)30,000, f.o.b. destination. Both the Pelzer purchase and the Alvarez sale werein transit at year-end. What amount should Stallman report as its December 31 inventory?

Hull Company’s record of transactions concerning part X for the month of April was as follows.

Purchases Sales

April 1 (balance on hand) 100 @ $5.00 April 5 300

4 400 @ 5.10 12 200

11 300 @ 5.30 27 800

18 200 @ 5.35 28 150

26 600 @ 5.60

30 200 @ 5.80

Instructions

(a) Compute the inventory at April 30 on each of the following bases. Assume that perpetual inventory records are kept inunits only. Carry unit costs to the nearest cent.

(1) First-in, first-out (FIFO).

(2) Last-in, first-out (LIFO).

(3) Average cost.

(b) If the perpetual inventory record is kept in dollars, and costs are computed at the time of each withdrawal, what amountwould be shown as ending inventory in (1), (2), and (3) above? (Carry average unit costs to four decimal places.)

Distinguish between product costs and period costs as they relate to inventory.

How might a company obtain a price index in order to apply dollar-value LIFO?

The management of Tritt Company has asked its accounting department to describe the effect upon the company’s financial position and its income statements of accounting for inventorieson the LIFO rather than the FIFO basis during 2017 and 2018. The accounting department is to assume that the change to LIFO wouldhave been effective on January 1, 2017, and that the initial LIFO base would have been the inventory value on December 31, 2016. Thefollowing are the company’s financial statements and other data for the years 2017 and 2018 when the FIFO method was employed.

Financial Position as of

12/31/16 12/31/17 12/31/18

Cash \( 90,000 \)130,000 \(154,000

Accounts receivable 80,000 100,000 120,000

Inventory 120,000 140,000 176,000

Other assets 160,000 170,000 200,000

Total assets \)450,000 \(540,000 \)650,000

Accounts payable \( 40,000 \) 60,000 \( 80,000

Other liabilities 70,000 80,000 110,000

Common stock 200,000 200,000 200,000

Retained earnings 140,000 200,000 260,000

Total liabilities and equity \)450,000 \(540,000 \)650,000

Income for Years Ended

12/31/17 12/31/18

Sales revenue \(900,000 \)1,350,000

Less: Cost of goods sold 505,000 756,000

Other expenses 205,000 304,000

710,000 1,060,000

Income before income taxes 190,000 290,000

Income taxes (40%) 76,000 116,000

Net income \(114,000 \) 174,000

Other data:

1. Inventory on hand at December 31, 2016, consisted of 40,000 units valued at \(3.00 each.

2. Sales (all units sold at the same price in a given year):

2017—150,000 units @ \)6.00 each 2018—180,000 units @ \(7.50 each

3. Purchases (all units purchased at the same price in given year):

2017—150,000 units @ \)3.50 each 2018—180,000 units @ $4.40 each

4. Income taxes at the effective rate of 40% are paid on December 31 each year.

Instructions

Name the account(s) presented in the financial statements that would have different amounts for 2018 if LIFO rather than FIFOhad been used, and state the new amount for each account that is named. Show computations.
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