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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 鈥渋nventory over and short鈥� account.

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Most popular questions from this chapter

Specific identification is sometimes said to be the ideal method of assigning a cost to inventory and to the cost of goods sold. Briefly indicate the arguments for and againstthis method of inventory valuation.

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?

FIFO, average-cost, and LIFO methods are often used instead of specific identification for inventory valuation purposes. Compare these methods with the specific identification method, discussing the theoretical propriety of each method in the determination of income and asset valuation.

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?

Question: Craig Company asks you to review its December 31, 2017, inventory values and prepare the necessary adjustments to the books. The following information is given to you.

1. Craig uses the periodic method of recording inventory. A physical count reveals \(234,890 of inventory on hand at December 31, 2017.

2. Not included in the physical count of inventory is \)13,420 of merchandise purchased on December 15 from Browser. This merchandise was shipped f.o.b. shipping point on December 29 and arrived in January. The invoice arrived and was recorded on December 31.

3. Included in inventory is merchandise sold to Champy on December 30, f.o.b. destination. This merchandise was shipped after it was counted. The invoice was prepared and recorded as a sale on account for \(12,800 on December 31. The merchandise cost \)7,350, and Champy received it on January 3.

4. Included in inventory was merchandise received from Dudley on December 31 with an invoice price of \(15,630. The merchandise was shipped f.o.b. destination. The invoice, which has not yet arrived, has not been recorded.

5. Not included in inventory is \)8,540 of merchandise purchased from Glowser Industries. This merchandise was received on December 31 after the inventory had been counted. The invoice was received and recorded on December 30.

6. Included in inventory was \(10,438 of inventory held by Craig on consignment from Jackel Industries.

7. Included in inventory is merchandise sold to Kemp f.o.b. shipping point. This merchandise was shipped on December 31 after it was counted. The invoice was prepared and recorded as a sale for \)18,900 on December 31. The cost of this merchandise was \(10,520, and Kemp received the merchandise on January 5.

8. Excluded from inventory was a carton labeled 鈥淧lease accept for credit.鈥� This carton contains merchandise costing \)1,500 which had been sold to a customer for $2,600. No entry had been made to the books to reflect the return, but none of the returned merchandise seemed damaged; Craig will honor the return.

Instructions

(a) Determine the proper inventory balance for Craig Company at December 31, 2017.

(b) Prepare any correcting entries to adjust inventory to its proper amount at December 31, 2017. Assume the books have not been closed.
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