perpetual inventory system

Examples of perpetual 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.
  • A company using the perpetual inventory system would have a book inventory that is exactly (within a small margin of error) the same as the physical (real) inventory.
  • Many small businesses still only have a periodic system of inventory.
  • Perpetual inventory systems can still be vulnerable to errors due to overstatements (phantom inventory) or understatements (missing inventory) that occurs as a result of theft, breakage, scanning errors, or untracked inventory movements.
  • 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.

• 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.
  • When analyzing the results, a company must compare the inventory counts submitted by each team with the inventory count from the computer system.
  • If any discrepancies occur between the actual number and the computer system, it may be necessary to recount the disputed inventory items to determine the correct quantity.
  • An inventory control system ensures that the company's books reflect the actual inventory on hand.

• 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.

• 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.
  • The ending inventory balance reflects recent inventory costs.
  • Under this system, the business may maintain costs under FIFO but track an offset in the form of a LIFO reserve.
  • 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.

• 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.
  • It does lack some of the planning and control benefits of the perpetual system.
  • The perpetual system requires continuous recording of receipt and disbursement for every item of inventory.

• Gross Profit Method

  • An inventory valuation allows a company to provide a monetary value for items that make up their inventory.
  • A company will chose an inventory accounting system, either perpetual or periodic.
  • In perpetual inventory the accounting records must show the amount of inventory on hand at all times.
  • While the best way to value inventory is to perform a physical inventory, in certain business operations, taking a physical inventory is impossible or impractical.
  • There are two methods to estimate inventory cost, the retail inventory method and the gross profit method.

• LIFO Method

  • LIFO under perpetual inventory procedure: Under this procedure, the inventory composition and balance are updated with each purchase and sale.
  • Applying LIFO on a perpetual basis during the accounting period, results in different ending inventory and cost of goods sold figures than applying LIFO only at year-end using periodic inventory procedure.
  • For this reason, if LIFO is applied on a perpetual basis during the period, special inventory adjustments are sometimes necessary at year-end to take full advantage of using LIFO for tax purposes.
  • Applying LIFO on a perpetual basis during the accounting period, results in different ending inventory and cost of goods sold figures than applying LIFO only at year-end using periodic inventory procedure.
  • For this reason, if LIFO is applied on a perpetual basis during the period, special inventory adjustments are sometimes necessary at year-end to take full advantage of using LIFO for tax purposes.

• 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.
  • The benefit of a properly used and maintained inventory management system is that it allows management to be able to know how much inventory it has at any given time.
  • 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

• Specific Identification Method

  • The company computes the ending inventory as shown in.
  • Therefore, periodic and perpetual inventory procedures produce the same results for the specific identification method.
  • The merchandise inventory figure used by accountants depends on the quantity of inventory items and the cost of the items.
  • Specific identification is a method of finding out ending inventory cost.
  • Therefore, periodic and perpetual inventory procedures produce the same results for the specific identification method.