Inventories Q6

ualQ6: Describe the two main methods of accounting for inventory transactions (principally purchases and sales of inventory). Which method is the most popular? Why is this the case?

A:

The two main methods of accounting for inventory transactions are the perpetual and periodic methods.

Perpetual method:

Study Guide Chapter 4 Section 4-2 page 4-6:

“The perpetual method of keeping records of transactions of inventories (principally purchases and sales of inventories) records each transaction involving inventories as it occurs; every single one … Besides keeping track of each item of inventories (which is great for helping control this asset in a firm), the perpetual method has the great benefit that it allows the cost of goods sold to be constantly recorded as a firm makes each sale.” 

Periodic method:

Study Guide Chapter 4 Section 4-2 page 4-6:

“The other method of recording transactions of inventories is the periodic method. Unlike the perpetual method, which is constantly or perpetually recording transactions of inventories as they occur each day, the periodic method does not do this. So, in this aspect it is a lot simpler to use. It only measures the value of inventories and the cost of goods sold at the end of each period; not day-by-day. So how do we do this at the end of each period, if we are not recording the movement of inventories each day? Well, we do it by physically counting the stock at the end of each period; that is right, every single item of inventory at the end of each period. This then allows us to calculate the cost of goods sold at the end of each period.

Using the periodic method, we only measure inventories and calculate cost of goods sold periodically, not in real-time.”

The perpetual method is the most popular method. This method allows a firm to keep track of its inventory and cost of goods sold on a real-time basis, rather than wait to period end. The development of technology has made this method much easier to implement.

 

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