CASE STUDY #1 SLO 2: Distinguish between perpetual and periodic inventory system
ID: 2791979 • Letter: C
Question
CASE STUDY #1
SLO 2: Distinguish between perpetual and periodic inventory systems.
Northeast Orthopedic Clinic prescribes a variety of medical supplies for the treatment of various patient conditions, Although patients are free to purchase the medical supplies from any supplier they choose, the clinic provides the option of acquiring most of the items form the clinic. Standard markup procedure is to price the supplies at 300 percent of cost.
Medical supplies are physically inventoried at the end of the each month, and the computer records are adjusted monthly for any discrepancies. After this adjustment, medical supplies are ordered based on a comparison of standard order quantities to supplies on hand.
At the end of the fiscal year, a comparison of the computer’s perpetual inventory listing of medical supplies on hand to actual supplies per physical inventory revealed the following:
Inventory Number
Description
Average Unit Cost
Quantity on Hand Per Computer
Quantity on Hand per Physical Inventory
104
Wrist compression support
$ 8
10
7
112
Arm sling
$ 9
12
10
114
Carpal tunnel wrist support
$ 10
5
4
116
Thumb brace
$ 12
7
6
121
Clavicle support
$ 14
11
10
123
Lumbosacral support
$ 25
15
12
130
Dorsiwedge night splint
$ 72
4
2
Compute the ending inventory value per the computer
Compute the ending inventory value per the physical inventory
Which of the two values should appear in the financial statements? Why?
List three common reasons there might be a discrepancy between the perpetual inventory per the computer and the physical inventory
Are additional controls over the supplies inventory needed? Why or why not? *
Suggest one supplies inventory control that should be considered*
*Requires additional research- PLEASE PROVIDE EXCEL FORMULAS AS WORK NEEDS TO BE TRANSFERRED TO EXCEL
Inventory Number
Description
Average Unit Cost
Quantity on Hand Per Computer
Quantity on Hand per Physical Inventory
104
Wrist compression support
$ 8
10
7
112
Arm sling
$ 9
12
10
114
Carpal tunnel wrist support
$ 10
5
4
116
Thumb brace
$ 12
7
6
121
Clavicle support
$ 14
11
10
123
Lumbosacral support
$ 25
15
12
130
Dorsiwedge night splint
$ 72
4
2
Explanation / Answer
PERPETUAL INVENTORY SYSTEM:
Under this system, the inventory balance is calculated after every transaction of purchase and sell under specified system like First-in-First-out(FIFO) ,Last-in –First –Out(LIFO), Weighted average etc.
From accounting point of view, cost of sales are determined at the time of selling. At the time of sell, Sales are credited and Cash or Accounts Receivable are debited. In addition to this, Cost of Goods Sold are debited and Inventory is credited. At the time of purchase, Inventory is debited and Cash or Accounts Payable is credited.
PERIDIC INVENTORY SYSTEM
Under periodic inventory system, the Cost of Goods sold is determined periodically after taking physical inventory.
At the time of sell, Sales are credited and Cash or Accounts Receivable are debited. No entry is made for Cost of Goods Sold. At the time of purchase, Purchase Account is debited and Cash or Accounts Payable is credited.
At the end of specified period based on physical inventory, Closing physical inventory account is debited . Beginning inventory and Purchase accounts are credited. Cost of Goods Sold is calculated based on Purchase, Beginning and Closing Inventory.
ENDING INVENTORY VALUE PER THE COMPUTER:
A
B
C=A*B
Inventory Number
Description
Average Unit Cost
Quantity on Hand Per Computer
Inventory Value per the computer
104
Wrist compression support
$8
10
$80
112
Arm sling
$9
12
$108
114
Carpal tunnel wrist support
$10
5
$50
116
Thumb brace
$ 12
7
$84
121
Clavicle support
$14
11
$154
123
Lumbosacral support
$25
15
$375
130
Dorsiwedge night splint
$72
4
$288
TOTAL
$1,139
Ending Inventory value per computer=$1,139
ENDING INVENTORY VALUE PER THE PHYSICAL INVENTORY:
A
D
E=A*D
Inventory Number
Description
Average Unit Cost
Quantity on Hand per Physical Inventory
Inventory Value per the physical inventory
104
Wrist compression support
$8
7
$56
112
Arm sling
$9
10
$90
114
Carpal tunnel wrist support
$10
4
$40
116
Thumb brace
$ 12
6
$72
121
Clavicle support
$14
10
$140
123
Lumbosacral support
$25
12
$300
130
Dorsiwedge night splint
$72
2
$144
TOTAL
$842
Ending Inventory value per the physical inventory=$842
The physical inventory value should appear in the Financial Statement.
The Financial Statement should project True and Fair financial position of the company.
Physical inventory represents the true amount available in inventory. Hence Physical inventory value should appear in Financial Statement
Reasons for discrepancy between the perpetual inventory per the computer and the physical inventory
Common reasons for discrepancy:
PHYSICAL INVENTORY is a very important control over inventory.
Additionally there can be surprise checks at higher frequencies in case of high valued inventories
A
B
C=A*B
Inventory Number
Description
Average Unit Cost
Quantity on Hand Per Computer
Inventory Value per the computer
104
Wrist compression support
$8
10
$80
112
Arm sling
$9
12
$108
114
Carpal tunnel wrist support
$10
5
$50
116
Thumb brace
$ 12
7
$84
121
Clavicle support
$14
11
$154
123
Lumbosacral support
$25
15
$375
130
Dorsiwedge night splint
$72
4
$288
TOTAL
$1,139
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