Financial Accounting Quiz: Inventory Perpetual Vs Periodic
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Inventory Perpetual Vs PeriodicQuestion 1 of 20

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?

No adjustment is needed as the goods had not been received and the invoice was not recorded by year-end.
Debit Inventory for $5,000 and credit Accounts Payable for $5,000.
Debit Inventory for $5,000 and credit Cash for $5,000.
Debit Cost of Goods Sold for $5,000 and credit Accounts Payable for $5,000.
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Financial Accounting Quiz

Financial Accounting Quiz: Inventory Perpetual Vs Periodic

Practice Inventory Perpetual Vs Periodic in Financial Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Inventory Perpetual Vs Periodic, giving you a quick way to practice the rules, question types, and explanations that matter most for Financial Accounting.

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Question 1

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?

  1. No adjustment is needed as the goods had not been received and the invoice was not recorded by year-end.
  2. Debit Inventory for $5,000 and credit Accounts Payable for $5,000. (correct answer)
  3. Debit Inventory for $5,000 and credit Cash for $5,000.
  4. Debit Cost of Goods Sold for $5,000 and credit Accounts Payable for $5,000.
Explanation: 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.

Question 2

A company that uses a perpetual inventory system sells merchandise for $5,000 cash. The cost of this merchandise was $3,000. One week later, the customer returns merchandise for which they receive a full cash refund of $1,000. The cost of the merchandise returned to the company's inventory was $600. Which of the following compound journal entries correctly records the sales return?

  1. Debit Sales Returns and Allowances for $1,000; Credit Cash for $1,000.
  2. Debit Sales Returns and Allowances for $1,000 and debit Inventory for $600; Credit Cash for $1,000 and credit Cost of Goods Sold for $600. (correct answer)
  3. Debit Sales Returns and Allowances for $1,000 and debit Inventory for $1,000; Credit Cash for $1,000 and credit Cost of Goods Sold for $1,000.
  4. Debit Inventory for $600 and debit Sales Returns and Allowances for $400; Credit Cash for $1,000.
Explanation: In a perpetual system, a sales return requires two actions: 1) recording the return of revenue at the selling price, and 2) recording the return of goods to inventory at cost. The first action is a debit to Sales Returns and Allowances and a credit to Cash (or Accounts Receivable). The second action is a debit to Inventory to increase the asset and a credit to Cost of Goods Sold to reverse the expense.

Question 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?

  1. 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. (correct answer)
  2. Under both systems, the $8,000 loss would be recorded with a debit to an 'Inventory Shrinkage Loss' account to ensure it is reported separately from Cost of Goods Sold.
  3. Under a perpetual system, the loss is ignored until the next accounting period; under a periodic system, the Inventory account is credited for $8,000.
  4. The $8,000 difference would affect the income statement under a perpetual system, but it would only affect the balance sheet under a periodic system.
Explanation: 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.Inaperiodicsystem,COGSiscalculatedasBeginningInventory+Purchases−EndingInventory.SincetheEndingInventoryisbasedonthephysicalcount(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.

Question 4

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?

  1. It simplifies the calculation of cost of goods sold, which is a complex closing entry in the periodic system.
  2. It provides timely, continuous information about inventory quantities, which helps prevent stockouts and optimize purchasing. (correct answer)
  3. It completely eliminates the need for a costly and disruptive physical inventory count at the end of the year.
  4. It ensures a more accurate valuation of ending inventory because the cost flow assumptions are applied more precisely.
Explanation: 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.

Question 5

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?

  1. $3,760 (correct answer)
  2. $3,260, which is net sales less cost of goods sold and freight charges.
  3. $4,000, which is the sales price less the original cost of the merchandise.
  4. $3,500, which is the sales price less cost of goods sold and freight charges.
Explanation: 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(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.

Question 6

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?

  1. Gross margin is overstated by $1,200, and the gross margin percentage is overstated. (correct answer)
  2. Gross margin is overstated by $1,200, but the gross margin percentage is unaffected by the error.
  3. Gross margin is correctly stated, but ending inventory is understated by $1,200.
  4. Both sales revenue and cost of goods sold are understated, leading to an understated gross margin.
Explanation: 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.

Question 7

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?

  1. Debit Purchases $6,000; Credit Accounts Payable $6,000.
  2. Debit Inventory $6,000; Credit Accounts Payable $6,000.
  3. Debit Inventory $5,500 and Debit Supplies $500; Credit Accounts Payable $6,000. (correct answer)
  4. Debit Cost of Goods Sold $5,500 and Debit Supplies Expense $500; Credit Accounts Payable $6,000.
Explanation: 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.

Question 8

A company using a periodic inventory system has the following account balances for the year:

  • Purchases: $500,000
  • Purchase Returns and Allowances: $25,000
  • Purchase Discounts: $10,000
  • Freight-In: $15,000
  • Beginning Inventory: $80,000
  • Ending Inventory: $70,000

Based on the information provided, what is the company's Cost of Goods Sold for the period?

  1. $480,000
  2. $460,000
  3. $510,000
  4. $490,000 (correct answer)
Explanation: The calculation requires two steps. First, calculate the Cost of Goods Purchased: Purchases (500k)−PurchaseReturns(500k) - Purchase Returns (25k) - Purchase Discounts (10k)+Freight−In(10k) + Freight-In (15k) = 480,000.Second,calculateCostofGoodsSold:BeginningInventory(480,000. Second, calculate Cost of Goods Sold: Beginning Inventory (80k) + Cost of Goods Purchased (480k)−EndingInventory(480k) - Ending Inventory (70k) = $490,000.

Question 9

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?

  1. Gross profit is overstated by $4,000, and ending inventory is overstated by $4,000. (correct answer)
  2. Gross profit is understated by $3,000, and ending inventory is overstated by $4,000.
  3. There is no effect on gross profit, but ending inventory is overstated by $4,000.
  4. Gross profit is overstated by $7,000, and ending inventory is understated by $4,000.
Explanation: 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.

Question 10

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?

  1. Total sales revenue earned to date.
  2. The amount of cash disbursed for inventory acquisitions.
  3. The cost of inventory on hand and the cost of goods sold to date. (correct answer)
  4. The total value of purchase returns and allowances processed.
Explanation: 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.

Question 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?

  1. Under the periodic system, the Purchases account is closed to Inventory; under the perpetual system, the Inventory account requires no closing entry.
  2. Under the perpetual system, Cost of Goods Sold is a permanent account; under the periodic system, it is a temporary account.
  3. 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. (correct answer)
  4. Both systems require closing entries that debit Beginning Inventory and credit Ending Inventory to the Income Summary account.
Explanation: 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.

Question 12

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?

  1. It is a permanent asset account that is adjusted to its correct balance by the year-end physical inventory count.
  2. It is a temporary expense account that is closed directly to Retained Earnings at the end of the period.
  3. 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. (correct answer)
  4. It is a contra-asset account that reduces the value of the beginning inventory to arrive at the cost of goods available for sale.
Explanation: 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.

Question 13

On May 10, a company sells an item of inventory for $1,000. If the company uses a perpetual inventory system, the gross profit from this specific sale can be determined immediately. Why is this not possible for a company using a periodic inventory system?

  1. Because a periodic system does not track sales revenue until the end of the accounting period.
  2. Because a periodic system does not maintain a continuous record of the cost of inventory sold for each transaction. (correct answer)
  3. Because a periodic system cannot be used with specific identification, FIFO, or LIFO cost flow assumptions.
  4. Because a periodic system records all inventory costs and cost adjustments in a single 'Inventory' asset account.
Explanation: A perpetual system maintains up-to-date records for both the quantity and cost of inventory on hand. When a sale occurs, the system records both the sales revenue and the cost of the goods sold, allowing for immediate calculation of gross profit. A periodic system does not track the cost of each individual sale. The total cost of goods sold is only determined at the end of the period after a physical inventory count is performed.

Question 14

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?

  1. Purchases
  2. Inventory
  3. Cost of Goods Sold (correct answer)
  4. Sales Returns and Allowances
Explanation: 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.

Question 15

A firm uses the periodic inventory system and the net method. It bought goods for $15,000 with credit terms of 2/10, n/30. The firm recorded the purchase correctly but paid the invoice on the 25th day, after the discount period had expired. What is the journal entry to record the payment of the full $15,000?

  1. Debit Accounts Payable $15,000; Credit Cash $15,000.
  2. Debit Accounts Payable $14,700 and Debit Purchase Discounts Lost $300; Credit Cash $15,000. (correct answer)
  3. Debit Accounts Payable $14,700 and Debit Interest Expense $300; Credit Cash $15,000.
  4. Debit Purchases $300 and Debit Accounts Payable $14,700; Credit Cash $15,000.
Explanation: Under the net method, the initial purchase was recorded at the net amount: $15,000 * (1 - 0.02) = $14,700. Accounts Payable was credited for this amount. When payment is made after the discount period, the full $15,000 cash is paid. The entry must clear the $14,700 liability, and the additional $300 paid is recorded in a 'Purchase Discounts Lost' account, which is treated as a financing expense.

Question 16

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?

  1. Debit Cash $8,000; Credit Sales Revenue $8,000.
  2. Debit Inventory on Consignment $10,000; Credit Inventory $10,000.
  3. Debit Accounts Receivable $8,000 and Debit Cost of Goods Sold $10,000; Credit Sales Revenue $8,000 and Credit Inventory $10,000.
  4. Debit Cash $8,000 and Debit Cost of Goods Sold $5,000; Credit Sales Revenue $8,000 and Credit Inventory $5,000. (correct answer)
Explanation: 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'.

Question 17

A company using the periodic inventory system purchased goods for $10,000 and later returned $2,000 of those goods. The bookkeeper neglected to record the purchase return transaction. A correct physical inventory count was performed at year-end. How will this error affect the company's cost of goods sold (COGS) for the period?

  1. COGS will be overstated by $2,000. (correct answer)
  2. COGS will be understated by $2,000.
  3. COGS will be unaffected because the ending inventory count was correct.
  4. COGS will be overstated by $2,000, and Accounts Payable will be overstated by $2,000.
Explanation: In the periodic system, COGS is calculated as Beginning Inventory + Net Purchases - Ending Inventory. Net Purchases = Purchases - Purchase Returns. By failing to record the $2,000 return, the Purchase Returns account is understated, which causes Net Purchases to be overstated by $2,000. Since Beginning Inventory and Ending Inventory (from the physical count) are correct, the overstatement in Net Purchases directly causes COGS to be overstated by $2,000.

Question 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?

  1. Cost of Goods Sold was understated by $15,000, and Net Income was overstated by $15,000. (correct answer)
  2. Ending Inventory was understated by $15,000, and Cost of Goods Sold was overstated by $15,000.
  3. Assets were correctly stated in total, but Net Income was overstated by $15,000.
  4. Both Purchases and Ending Inventory were understated by $15,000, resulting in no effect on Cost of Goods Sold.
Explanation: 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.

Question 19

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?

  1. Debit Inventory $20,000; Credit Accounts Payable $20,000.
  2. Debit Inventory $19,400; Credit Accounts Payable $19,400. (correct answer)
  3. Debit Purchases $19,400; Credit Accounts Payable $19,400.
  4. Debit Inventory $20,000; Credit Purchase Discounts $600 and Credit Accounts Payable $19,400.
Explanation: 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.

Question 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?

  1. $7,260 (correct answer)
  2. $7,240
  3. $6,860
  4. $7,400
Explanation: 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.Theamountpaidformerchandiseiscalculatedafterreturnsanddiscounts.Thediscountisbasedontheamountowedafterthereturn:(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.