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Question 3Q

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Intermediate Accounting (Kieso)
Found in: Page 421

Short Answer

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.

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Step by Step Solution

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.

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.

Most popular questions for Business-studies Textbooks

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.

Price per

Units Unit Total

Residential Pumps

Inventory at Feb. 28: 200 $ 400 $ 80,000

Purchases:

March 10 500 $ 450 $225,000

March 20 400 $ 475 $190,000

March 30 300 $ 500 $150,000

Sales:

March 15 500 $ 540 $270,000

March 25 400 $ 570 $228,000

Inventory at March 31: 500

Commercial Pumps

Inventory at Feb. 28: 600 $ 800 $480,000

Purchases:

March 3 600 $ 900 $540,000

March 12 300 $ 950 $285,000

March 21 500 $1,000 $500,000

Sales:

March 18 900 $1,080 $972,000

March 29 600 $1,140 $684,000

Inventory at March 31: 500

Accounting

(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.)

Analysis

(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?

Principles

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?

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