periodic inventory system

Examples of periodic inventory system in the following topics:

• Perpetual vs. Periodic Counting

  • Generally, this is accomplished by connecting the inventory system either with the order entry system or for a retail establishment the point of sale system.
  • Periodic inventory is when information about amount and availability of a product is updated only periodically.
  • In earlier periods, non-continuous or periodic inventory systems were more prevalent.
  • Many small businesses still only have a periodic system of inventory.
  • While the perpetual inventory method provides a close picture of the true inventory information, it is a good idea for companies using a perpetual inventory system to do a physical inventory periodically.

• Reporting Inventories

  • Companies must choose a method to track inventory.
  • There are ways to account for inventory, periodic and perpetual.
  • The perpetual inventory system requires accounting records to show the amount of inventory on hand at all times.
  • In the periodic inventory system, sales are recorded as they occur but the inventory is not updated.
  • Regardless of what inventory accounting system is used, it is good practice to perform a physical inventory at least once a year.

• Impact of Inventory Method on Financial Statement Analysis

  • It's important to note that these methods will be affected by the system used to update inventory – "perpetual" or "periodic".
  • A perpetual system updates inventory every time a change in inventory occurs, and a periodic system updates inventory at the end of the accounting period.
  • Under this system, the business may maintain costs under FIFO but track an offset in the form of a LIFO reserve.
  • Cost of goods sold is then beginning inventory plus purchases less the calculated cost of goods on hand at the end of the period.
  • In addition to the inventory method chosen, use of a perpetual or periodic inventory system will affect the amount of current assets in the balance sheet and gross profit in the income statement, especially when prices are changing.

• Cost Flow Assumptions

  • Inventory cost flow assumptions (e.g., FIFO) are necessary to determine the cost of goods sold and ending inventory.
  • LIFO and weighted average cost flow assumptions may yield different end inventories and COGS in a perpetual inventory system than in a periodic inventory system due to the timing of the calculations.
  • In the perpetual system, some of the oldest units calculated in the periodic units-on-hand ending inventory may get expended during a near inventory exhausting individual sale.
  • In the LIFO system, the weighted average system, and the perpetual system, each sale moves the weighted average, so it is a moving weighted average for each sale.
  • In contrast, in the periodic system, it is only the weighted average of the cost of the beginning inventory, the sum cost of all the purchases, less than the cost of the inventory, divided by the sum of the beginning units and the total units purchased.

• Nature of Inventory

  • These holdings are recorded in an accounting system .
  • There are two principal systems for determining inventory quantities on hand: periodic and perpetual system.
  • This system requires a physical count of goods on hand at the end of a period.
  • Because it is simple and requires records and adjustments mostly at the end of a period, it is widely used.
  • The perpetual system requires continuous recording of receipt and disbursement for every item of inventory.

• Gross Profit Method

  • A company will chose an inventory accounting system, either perpetual or periodic.
  • Periodic inventory is not updated on a regular basis.
  • Keep in mind the gross profit method assumes that gross profit ratio remains stable during the period.
  • Multiply sales made during the period by gross profit ratio to obtain estimated cost of goods sold.
  • The estimated cost of goods sold on the income statement for the period is $$1000\cdot.25 = $250$.

• Internal Controls

  • An inventory management system is a series of procedures, often aided by computer software, that tracks assets progression through inventory.
  • When the company receives that material, the amount should be noted in the inventory management system.
  • Companies usually conduct cycle counts periodically throughout an accounting period as a means to ensure that the information in its inventory management system is correct.
  • The auditor will then compare the count to the related information in the inventory management system.
  • Explain how a company would use storage, inventory management systems and inventory counts to control inventory

• Conducting a Physical Inventory

  • In addition, inventory control system software can speed the physical inventory process .
  • A perpetual inventory system tracks the receipt and use of inventory, and calculates the quantity on hand.
  • In the planning and preparation period, a list of stocks that need to be counted is set up.
  • When analyzing the results, a company must compare the inventory counts submitted by each team with the inventory count from the computer system.
  • An inventory control system ensures that the company's books reflect the actual inventory on hand.

• Impact of Measurement Error

  • Inventory systems can be vulnerable to errors due to overstatements (phantom inventory) when the actual inventory is lower than the measurement or understatements (missing inventory) when the actual stocks are higher than the measurement.
  • Inventory controlling helps revenue and expenses be recognized.
  • A general rule is that overstatements of ending inventory cause overstatements of income, while understatements of ending inventory cause understatements of income.
  • Since financial statement users depend upon accurate statements, care must be taken to ensure that the inventory balance at the end of each accounting period is correct.
  • Female clerk doing inventory work using a handheld computer in a Tesco Lotus supermarket in Sakon Nakhon, Thailand

• Efficiency Metrics

  • Efficiency ratios for inventory measure how effectively a business uses its inventory resources.
  • In addition, excess inventory increases the risk of losses due to price declines or inventory obsolescence.
  • Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory (to calculate average inventory, add the balances of beginning and ending inventory and divide by 2)
  • The inventory turnover ratio is a measure of the number of times inventory is sold or used in a time period, such as a year.
  • The inventory conversion ratio is a measure of the number of days in a year it takes to sell inventory or convert it into cash.