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Inventory System Analysis: Perpetual vs. Periodic

Contrast advantages of perpetual & periodic inventory systems, evaluate effects on COGS & ending inventory using FIFO, LIFO & Avg. Cost methods with exercises.

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Inventory System Analysis: Perpetual vs. Periodic

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  1. Q 1: Under a periodic inventory system ending inventory and cost of goods sold are determined • After each sale • After each purchase and sale • At the end of the accounting period • Don’t know

  2. Q 2: Which of the following is not an advantage of the perpetual system? • Useful to determine shrinkage • Cheap to use in a manual as well as a computerized system • Useful to determine reorder needs • Timely updates of inventory balances and cost of goods sold

  3. Shrinkage • Is not a problem in a perpetual system • Must be reported as a separate loss on the income statement • May be treated as part of cost of goods sold expense • Can be deducted as an expense only if it has been reported to the police

  4. Beg. inventory: 20 units @ $5 = $100 Purchases: 60 units @ $20 = $1,200Purchases: 10 units @ $30 = $300Sales: 70 units. FIFO ending inventory is • $ 100 • $ 200 • $ 300 • $ 250 • $ 500

  5. Beg. inventory: 20 units @ $5 = $100 Purchases: 60 units @ $20 = $1,200Purchases: 10 units @ 30 = $300Sales: 70 units Using LIFO ending inventory will be • $ 100 • $ 200 • $ 300 • $ 250

  6. Beg. inventory: 20 units @ $5 = $100 Purchases: 60 units @ $20 = $1,200Purchases: 10 units @ 30 = $300Sales: 70 units Under LIFO cost of goods sold will be • $ 1,200 • $ 1,244 • $ 1,400 • $ 1,500

  7. Q 6: LIFO • Always results in lower income taxes than FIFO • Is used to show higher net income • Is not permitted unless the actual flow of inventory is last in, first out • Results in higher cost of goods sold during inflation

  8. Which of the following statements is false? LIFO • Must be used for financial reporting purposes, if it is used for tax purposes • May result in income manipulation • Is a method of cheating on income taxes • Requires extensive record keeping • Is not permitted in all countries

  9. LIFO Liquidation • Occurs because management does not purchase enough inventory • May be involuntary • May be deliberate to manipulate earnings • All of the above

  10. Exercise 15 • Determine ending inventory using FIFO • Determine ending inventory using LIFO • Determine ending inventory using Average Cost

  11. Dollar Value LIFO • Is used to manipulate earnings • Requires the use of inventory specific pools • Eliminates the need to determine if there have been increases or decreases in total inventory • Requires the use of price level indexes

  12. W Co. uses $ value LIFO. Base year inventory (index 100) cost $ 500,000. On 12/31/06, inventory on hand had a current cost $ 577,500 and base year cost of $ 525,000. The price level index on 12/31/06 is • .909 • 1 • 1.1 • 1.155

  13. W Co. uses $ value LIFO. Base year inventory (index 100) cost $ 500,000. On 12/31/06, inventory on hand had a current cost $ 577,500 and base year cost of $ 525,000. The price level index on 12/31/06 is 1.1. $value LIFO ending inventory on 12/31/06 is • 525,000 • 527,500 • 552,500 • 577,500

  14. Exercise 25 Determine ending $ value LIFO inventory for 2002 • Determine ending $ value LIFO inventory for 2003 • Determine ending $ value LIFO inventory for 2004

  15. C B C E A D D C D A. 18,000(FIFO) B. 13,800 (LIFO) C. 15,858 (Average) D C B $111,500 $90,500 95,700 Answers

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