Perpetual and Periodic Inventory systems

Question 1

What are the advantages of the perpetual Inventory system?

Answer 1

• Short term (monthly, quarterly) income statements can be easily prepared as the cost of sales is known at any time.
• The possibility of running out of inventory is reduced as the owner knows the level of stock at any time.
• Fast and slow moving inventory lines can be easily identified.

Question 2

What are the disadvantages of the perpetual inventory system?

Answer 2

• More expensive to set up than the periodic system
• Time consuming
• Unnecessary system for low cost items

Question 3

What does the Perpetual Inventory system do?

Answer 3

o Provides a continuous record of inventories purchased and sold throughout the period
o Permits the calculation of cost of sales continuously throughout the period

Question 4

What does the periodic system do?

Answer 4

o No continuous inventory records are maintained throughout the period
o Closing inventory is determined by stock take

Question 5

What is the defintion of inventory as per the AASB 102?

Answer 5

o Asset held for resale in the normal course of the business
o Partly finished products
o Supplies that will be consumed in the manufacture of a product or in providing a service

Question 6

How do you calculate gross profit from a retail entity?

Answer 6

Sales - Sales Returns - Cost of Sales

Question 7

Why are sales returns recorded separately to the sales account?

Answer 7

So it stands out more, Owners/Managers want to keep this number very low

To maintain customer loyalty and a high quality product