Perpetual Inventory System and Cost-Flow Assumption

Question 1

What are the main differences between the entries required for the Periodic and Perpetual inventory systems?

Answer 1

1. ) Perpetual uses the inventory account rather than purchases for the acquisition of inventory
2. ) Recording of COGS at sale rather than at the end of the period.

Question 2

What cost flow assumption is the same for both the periodic and perpetual systems?

Answer 2

First In First Out (FIFO).

Question 3

What cost flow assumption utilizes the latest purchases at time of sale?

Answer 3

Last In First Out (LIFO).

Question 4

What inventory system is implied when the moving average cost flow assumption is utilized?

Answer 4

Implies the perpetual inventory system.

Question 5

For which Inventory method should an ending inventory count be made?

Answer 5

Both periodic and perpetual.

Question 6

List the differences between moving and weighted average cost flow assumptions

Answer 6

1. )Moving average computes a new weighted average cost per unit after each purchase of inventory;
2. )Moving average results in lower Cost of Goods Sold during period of rising prices

Question 7

Is the LIFO cost flow assumption the same for the Perpetual and Periodic Inventory Systems?

Answer 7

no, they will differ. Using the perpetual system during a year of steady rising prices, it will yield a lower COGS. The periodic system only analyzes COGS at year end, while perpetual does at each sale.