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Inventory: Perpetual vs. Periodic - Financial Accounting

  1. Company P uses a perpetual inventory system, while Company R uses a periodic inventory system. Assume both companies have identical business transactions throughout the year. At year-end, before any adjusting or closing entries are made, which of the following accounts would appear in the general ledger trial balance of Company P but not Company R?
    Answer: Cost of Goods Sold In a perpetual system, the Cost of Goods Sold account is updated with every sale and thus appears in the trial balance throughout the period. In a periodic system, Cost of Goods Sold is not an account used during the period; it is calculated at the end of the period through adjusting and closing entries. Therefore, it would not appear on a pre-adjustment trial balance for Company R.
  2. A retail company is considering switching from a periodic inventory system to a perpetual inventory system. Which of the following provides the strongest justification for incurring the additional record-keeping costs associated with a perpetual system?
    Answer: It provides timely, continuous information about inventory quantities, which helps prevent stockouts and optimize purchasing. The primary advantage of a perpetual system is its ability to provide real-time data on inventory levels and cost of goods sold. This information is crucial for effective inventory management, including reordering, identifying slow-moving items, and preventing lost sales due to stockouts. This managerial benefit often outweighs the higher cost of maintaining the system.
  3. A company's perpetual inventory records indicate an inventory balance of $250,000 at year-end. A physical count of inventory on hand reveals a balance of only $242,000. The company attributes this $8,000 difference to normal shrinkage. How would the accounting for this discrepancy differ if the company had used a periodic system instead?
    Answer: Under a perpetual system, the $8,000 loss is explicitly recognized through an adjusting entry; under a periodic system, the loss is automatically absorbed into the Cost of Goods Sold calculation. In a perpetual system, the book-to-physical difference must be reconciled with an explicit journal entry, typically debiting Cost of Goods Sold (or a loss account) and crediting Inventory for $8,000. In a periodic system, COGS is calculated as Beginning Inventory + Purchases - Ending Inventory. Since the Ending Inventory is based on the physical count ($242,000), the $8,000 loss is automatically included in the COGS amount without a separate entry.
  4. Hartwell Company uses a perpetual inventory system and the FIFO cost flow assumption. During March, the company had the following transactions: March 1: Beginning inventory of 200 units at $15 each; March 10: Purchased 300 units at $18 each; March 15: Sold 250 units; March 20: Purchased 150 units at $20 each; March 25: Sold 200 units. If Hartwell had instead used a periodic inventory system with the same cost flow assumption, how would the cost of goods sold for March differ?
    Answer: Cost of goods sold would be the same under both inventory systems Under FIFO, the cost of goods sold will be identical whether using perpetual or periodic systems because FIFO always assigns the oldest costs to units sold first, regardless of when the calculation is performed. Perpetual: First sale (250 units): 200 @ $15 + 50 @ $18 = $3,900. Second sale (200 units): 200 @ $18 = $3,600. Total COGS = $7,500. Periodic: Total units sold = 450. Under FIFO: 200 @ $15 + 250 @ $18 = $7,500. Choice A is incorrect as it suggests a difference exists favoring periodic. Choice B is incorrect as it suggests a difference exists favoring perpetual. Choice C is incorrect as it overstates a non-existent difference.
  5. Based on the information provided, what is the company's Cost of Goods Sold for the period?
    Answer: $490,000 The calculation requires two steps. First, calculate the Cost of Goods Purchased: Purchases ($500k) - Purchase Returns ($25k) - Purchase Discounts ($10k) + Freight-In ($15k) = $480,000. Second, calculate Cost of Goods Sold: Beginning Inventory ($80k) + Cost of Goods Purchased ($480k) - Ending Inventory ($70k) = $490,000.
  6. A company that uses a perpetual inventory system and the net method of recording purchases acquires merchandise on account for $20,000, with credit terms of 3/15, n/45. Which journal entry correctly records this purchase?
    Answer: Debit Inventory $19,400; Credit Accounts Payable $19,400. Under the net method, the purchase is recorded at its cash equivalent price, assuming the discount will be taken. The net amount is $20,000 * (1 - 0.03) = $19,400. In a perpetual system, purchases of merchandise are debited directly to the Inventory account. Therefore, the entry is a debit to Inventory and a credit to Accounts Payable for $19,400.
  7. A key difference between the perpetual and periodic inventory systems is the timeliness of information available to management. Which of the following can be determined from the accounting records of a company using a perpetual system at any point during the period, but can only be determined for a company using a periodic system after a physical count?
    Answer: The cost of inventory on hand and the cost of goods sold to date. A perpetual system maintains a continuous record of inventory on hand and the cumulative cost of goods sold. A periodic system does not. In a periodic system, the cost of goods sold and the value of ending inventory are unknown until a physical count is taken at the end of the period and the COGS formula is applied. The other items (sales, cash payments, returns) are tracked as they occur in both systems.
  8. Artisan Corp. (the consignor) ships goods costing $10,000 to Gallery Inc. (the consignee) to be sold on consignment. Artisan uses a perpetual inventory system. Subsequently, Gallery Inc. reports that it has sold half of the consigned goods for $8,000 cash. Which journal entry should Artisan Corp. make to record the sale reported by Gallery?
    Answer: Debit Cash $8,000 and Debit Cost of Goods Sold $5,000; Credit Sales Revenue $8,000 and Credit Inventory $5,000. When the consignee sells the goods, the consignor recognizes the sale. Under the perpetual system, this requires two entries (often combined). First, record the revenue and the receivable/cash from the consignee (Debit Cash/Receivable $8,000, Credit Sales Revenue $8,000). Second, recognize the expense and reduce inventory (Debit COGS $5,000, Credit Inventory $5,000). The cost is $5,000 because only half of the $10,000 in consigned goods were sold. Note that 'Inventory' would technically be 'Inventory on Consignment'.
  9. On December 28, Year 1, a company using a perpetual inventory system purchased goods for $5,000, terms FOB shipping point. The goods were shipped on December 29, Year 1, and arrived at the company's warehouse on January 3, Year 2. The invoice was received and the transaction was recorded on January 4, Year 2. What adjusting entry is necessary for the Year 1 financial statements?
    Answer: Debit Inventory for $5,000 and credit Accounts Payable for $5,000. With terms FOB shipping point, legal title to the goods passes to the buyer when the goods are shipped. Therefore, the buyer owned the inventory as of December 29, Year 1, even though it had not been physically received. To ensure the financial statements are correct, the inventory and related liability must be recorded in Year 1. The adjusting entry is a debit to Inventory and a credit to Accounts Payable.
  10. In a periodic inventory system, the 'Purchases' account is used to record the acquisition of inventory. Which of the following statements best describes the nature and accounting treatment of the 'Purchases' account?
    Answer: It is a temporary account that accumulates the gross cost of inventory acquired and is a component in the calculation of Cost of Goods Sold. The Purchases account is a temporary account used only in the periodic system to accumulate the total cost of merchandise purchased for resale during an accounting period. At the end of the period, its balance is used in the COGS calculation (Beginning Inventory + Net Purchases - Ending Inventory), and then it is closed to Income Summary. It is not an asset, an expense (by itself), or a contra-asset account.
  11. Consider the process of preparing closing entries at the end of an accounting period. Which statement correctly contrasts the closing entries for inventory-related accounts under the periodic and perpetual systems?
    Answer: The periodic system's closing process establishes the ending inventory balance in the general ledger and calculates COGS; the perpetual system's closing process simply closes the already determined COGS balance. Under a periodic system, a series of closing entries are needed to remove the beginning inventory balance, add the ending inventory balance (from the physical count), and combine purchases-related accounts to calculate and record COGS. Under a perpetual system, the Inventory account is already up-to-date (barring shrinkage) and COGS has been accumulated throughout the period. The closing process for the perpetual system simply involves closing the temporary COGS expense account to Income Summary, like any other expense.
  12. Wellington Corp uses a periodic inventory system. During the year, the company recorded purchases of $450,000 and purchase returns of $25,000. The physical inventory count at year-end showed $85,000 in inventory, compared to $75,000 at the beginning of the year. If Wellington discovers that $8,000 of inventory was double-counted during the physical count, what adjustment is needed to properly state cost of goods sold?
    Answer: Increase cost of goods sold by $8,000 to correct for the inventory overstatement error Under periodic system: COGS = Beginning Inventory + Net Purchases - Ending Inventory. Initially calculated: COGS = $75,000 + $425,000 - $85,000 = $415,000. After correction: Ending inventory should be $77,000 ($85,000 - $8,000). Corrected COGS = $75,000 + $425,000 - $77,000 = $423,000. The adjustment needed is an increase of $8,000 ($423,000 - $415,000). Choice B incorrectly suggests decreasing COGS. Choice C incorrectly doubles the adjustment amount. Choice D incorrectly suggests the error affects beginning inventory calculations and uses wrong direction.
  13. Northwood Industries switched from periodic to perpetual inventory system at the beginning of Year 2. In Year 1 (periodic), they recorded purchases of $380,000 and had beginning inventory of $65,000 and ending inventory of $85,000. In Year 2 (perpetual), they recorded the same dollar volume of purchases and the same beginning/ending inventory amounts. However, the perpetual system showed cost of goods sold differing from the periodic calculation by $4,000. What is the most likely explanation for this difference?
    Answer: Perpetual system captured inventory shrinkage losses that periodic missed during the year Under a periodic system, COGS = Beginning Inventory + Purchases - Ending Inventory. Any shrinkage during the year is automatically included in COGS since ending inventory is based on physical count. Under perpetual system, inventory records are maintained continuously, but shrinkage (theft, damage, etc.) isn't recorded until discovered. If the perpetual records aren't adjusted for shrinkage, the COGS calculation differs from periodic. Since the problem states same beginning/ending amounts, the $4,000 difference likely represents shrinkage that perpetual system recorded separately. Choice B is incorrect as cost flow assumptions are independent of system type. Choice C is incorrect as purchase discounts affect both systems similarly. Choice D is incorrect as this would affect both systems if not properly recorded.
  14. Pacific Retailers uses a perpetual inventory system and sells two products. During October, Product A had sales of $75,000 (500 units) and Product B had sales of $60,000 (300 units). The perpetual system showed cost of goods sold of $45,000 for Product A and $42,000 for Product B. A month-end physical count revealed actual inventory was $8,000 less than the perpetual records showed. If the shortage is allocated based on the ratio of perpetual COGS balances, what adjustment is needed to Product A's inventory account?
    Answer: Credit Product A inventory by $4,138 to reflect its proportionate share of the total shortage The shortage should be allocated based on the ratio of perpetual COGS balances as stated in the problem. Product A COGS = $45,000, Product B COGS = $42,000, Total COGS = $87,000. Product A's allocation ratio = $45,000 ÷ $87,000 = 51.72%. Product A's share of the $8,000 shortage = $8,000 × 51.72% = $4,138. This requires a credit to Product A inventory to reduce it by $4,138. Choice B incorrectly uses sales revenue ratio ($75,000/$135,000 = 55.56% × $8,000 = $4,444). Choice C incorrectly uses equal allocation ($8,000 ÷ 2 = $4,000). Choice D incorrectly uses unit ratio (500/800 = 62.5% × $8,000 = $5,000).
  15. A company that uses a perpetual inventory system receives a single invoice for a $6,000 purchase on account. The purchase includes merchandise intended for resale with a cost of $5,500 and office supplies for internal use costing $500. Which of the following is the correct journal entry to record this transaction?
    Answer: Debit Inventory $5,500 and Debit Supplies $500; Credit Accounts Payable $6,000. In a perpetual system, purchases of merchandise for resale are debited to the Inventory account. Purchases of other assets, like supplies, are debited to their respective asset accounts (e.g., Supplies). The total liability is credited to Accounts Payable. It is incorrect to debit the entire amount to Inventory or to expense the merchandise immediately as Cost of Goods Sold.
  16. A company using a perpetual system sells merchandise on account for $12,000, with terms 2/10, n/30. The cost of the merchandise sold is $8,000. The company prepaid $500 in freight costs for the customer (FOB destination). Assuming the customer pays the invoice within the discount period, what is the gross profit on this sale?
    Answer: $3,760 Gross profit is calculated as Net Sales minus Cost of Goods Sold. Net Sales is the sales revenue less any sales discounts. The sales discount is $12,000 * 2% = $240. So, Net Sales = $12,000 - $240 = $11,760. The Cost of Goods Sold is given as $8,000. Therefore, Gross Profit = $11,760 - $8,000 = $3,760. Freight-Out ($500) is a selling expense, not a component of Cost of Goods Sold, so it does not affect the gross profit calculation.
  17. On December 31, a company using a periodic system sells goods costing $4,000 to a customer for $7,000 on account. The sale was recorded correctly. However, these goods were mistakenly included in the year-end physical inventory count. What is the combined effect of this error on the company's gross profit and ending inventory for the year?
    Answer: Gross profit is overstated by $4,000, and ending inventory is overstated by $4,000. The error causes Ending Inventory to be overstated by $4,000. In the periodic COGS formula (Beginning Inventory + Purchases - Ending Inventory), overstating Ending Inventory causes Cost of Goods Sold to be understated by $4,000. Since Gross Profit = Sales - COGS, and Sales was recorded correctly, an understated COGS leads to an overstated Gross Profit of $4,000. Thus, both Ending Inventory and Gross Profit are overstated by $4,000.
  18. A company uses a periodic inventory system. During the last week of the year, it purchased $15,000 of inventory on account. The bookkeeper erroneously debited Office Supplies for $15,000 and credited Accounts Payable for $15,000. The error was discovered after financial statements were issued. A physical count of inventory was performed correctly at year-end. What was the effect of this error on the company's financial statements?
    Answer: Cost of Goods Sold was understated by $15,000, and Net Income was overstated by $15,000. In a periodic system, COGS = Beginning Inventory + Net Purchases - Ending Inventory. The error caused the Purchases account to be understated by $15,000. Since Ending Inventory was determined by a correct physical count, the full amount of the error in Purchases flows to Cost of Goods Sold, causing COGS to be understated by $15,000. An understatement of COGS (an expense) leads to an overstatement of Net Income by $15,000.
  19. A company using a perpetual inventory system made a credit sale for $2,000. The cost of the inventory sold was $1,200. The bookkeeper correctly recorded the revenue portion of the transaction but completely omitted the entry to record the cost of the sale. What is the impact of this omission on the company's gross margin and gross margin percentage?
    Answer: Gross margin is overstated by $1,200, and the gross margin percentage is overstated. The omitted entry was Debit Cost of Goods Sold $1,200 and Credit Inventory $1,200. Because the debit to COGS was missed, COGS is understated by $1,200. Gross margin (Sales - COGS) is therefore overstated by $1,200. The gross margin percentage (Gross Margin / Sales) will also be overstated because the numerator (Gross Margin) is too high while the denominator (Sales) is correct.
  20. A company uses the periodic inventory system and the gross method. On June 5, it purchased merchandise on account for $8,000, terms 2/10, n/30. The company also paid $400 in cash for freight costs (FOB shipping point) for this purchase. On June 8, it returned $1,000 of the merchandise. On June 14, the company paid the invoice in full. What is the total net cash outflow related to this series of transactions?
    Answer: $7,260 The total cash outflow is the sum of the cash paid for freight and the cash paid for the merchandise. The freight cost is $400. The amount paid for merchandise is calculated after returns and discounts. The discount is based on the amount owed after the return: ($8,000 - $1,000) = $7,000. The discount is 2% of $7,000, which is $140. The cash paid for the invoice is $7,000 - $140 = $6,860. The total cash outflow is the sum of the freight and the inventory payment: $400 + $6,860 = $7,260.

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