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?
Perpetual and periodic inventory are the two inventory systems for controlling inventory. The balance under these two inventories would often differ.
Basis of difference
A perpetual inventory is a process of keeping track of inventories continuously.
Periodic inventory keeps checking on inventory after a period like annually.
Under perpetual inventory, the inventory account is maintained for all purchases and issues.
Under periodic inventory, only the purchase account is maintained.
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.
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.
Accounting, Analysis, and Principles
Englehart Company sells two types of pumps. One is large and is for commercial use. The other is smaller and is used in residentialswimming pools. The following inventory data is available for the month of March.
Units Unit Total
Inventory at Feb. 28: 200 $ 400 $ 80,000
March 10 500 $ 450 $225,000
March 20 400 $ 475 $190,000
March 30 300 $ 500 $150,000
March 15 500 $ 540 $270,000
March 25 400 $ 570 $228,000
Inventory at March 31: 500
Inventory at Feb. 28: 600 $ 800 $480,000
March 3 600 $ 900 $540,000
March 12 300 $ 950 $285,000
March 21 500 $1,000 $500,000
March 18 900 $1,080 $972,000
March 29 600 $1,140 $684,000
Inventory at March 31: 500
(a) Assuming Englehart uses a periodic inventory system, determine the cost of inventory on hand at March 31 and thecost of goods sold for March under first-in, first-out (FIFO).
(b) Assume Englehart uses dollar-value LIFO and one pool, consisting of the combination of residential and commercialpumps. Determine the cost of inventory on hand at March 31 and the cost of goods sold for March. Assume Englehart’sinitial adoption of LIFO is on March 1. Use the double-extension method to determine the appropriate price indices.
(Hint: The price index for February 28/March 1 should be 1.00.) (Round the index to three decimal places.)
(a) Assume you need to compute a current ratio for Englehart. Which inventory method (FIFO or dollar-value LIFO) doyou think would give you a more meaningful current ratio?
(b) Some of Englehart’s competitors use LIFO inventory costing and some use FIFO. How can an analyst compare theresults of companies in an industry, when some use LIFO and others use FIFO?
Can companies change from one inventory accounting method to another? If a company changes to an inventory accounting methodused by most of its competitors, what are the trade-offs in terms of the conceptual framework discussed in Chapter 2 of the textbook?
Question: Fong Sai-Yuk Company sells one product. Presented below is information for January for Fong Sai-Yuk Company.
Jan. 1 Inventory 100 units at $5 each
4 Sale 80 units at $8 each
11 Purchase 150 units at $6 each
13 Sale 120 units at $8.75 each
20 Purchase 160 units at $7 each
27 Sale 100 units at $9 each
Fong Sai-Yuk uses the FIFO cost flow assumption. All purchases and sales are on account.
(a) Assume Fong Sai-Yuk uses a periodic system. Prepare all necessary journal entries, including the end-of-month closing entry to record cost of goods sold. A physical count indicates that the ending inventory for January is 110 units.
(b) Compute gross profit using the periodic system.
(c) Assume Fong Sai-Yuk uses a perpetual system. Prepare all necessary journal entries.
(d) Compute gross profit using the perpetual system.
Zonker Inc. purchases 500 units of an item at an invoice cost of $30,000. What is the cost per unit? If the goods are shipped f.o.b. shipping point and the freight bill was$1,500, what is the cost per unit if Zonker Inc. pays the freight charges? If these items were bought on 2/10, n/30terms and the invoice and the freight bill were paid within the 10-day period, what would be the cost per unit?
At the balance sheet date, Clarkson Company held title to goods in transit amounting to $214,000. This amount was omitted from the purchases figure for the year and also from the ending inventory. What is the effect of this omission on the net income for the year as calculated when the books are closed? What is the effect on the company’s financial position as shown in its balance sheet? Is materiality a factor in determining whether an adjustment for this item should be made?
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