Accounting Made Simple 25

Question 1

1. Under GAAP, there are TWO PRIMARY METHODS of keeping track of inventory:

Answer 1

a. The PERPETUAL METHOD

b. The PERIODIC METHOD

Question 2

2. A business using the PERPETUAL METHOD is:

Answer 2

keeping real time information on inventory levels and tracking inventory on an item by item basis. Examples are retail locations that use barcodes and point of sale scanners.

Question 3

3. What are the advantages of using the PERPETUAL INVENTORY SYSTEM?

Answer 3

There are two:
a. It allows a business to see exactly how much inventory they have on hand at any given moment, making it easier to know when to order more.

Question 4

4. Second benefit of the PERPETUAL INVENTORY SYSTEM:

Answer 4

It also improves the accuracy of the company’s Financial Statements because it allows for very accurate record keeping as to COGS over a given period.

Question 5

5. What is the primary disadvantage of the PERPETUAL METHOD?

Answer 5

The cost of implementation

Question 6

6. What is the PERIODIC METHOD OF INVENTORY?

Answer 6

It is a system in which inventory is counted at REGULAR INTERVALS (at month end, for instance).

Question 7

7. What is one drawback of the PERIODIC METHOD?

Answer 7

A business will know how much inventory it has right after taking inventory, but not in between inventory counts.

Question 8

8. What is another drawback of the PERIODIC METHOD?

Answer 8

The business will NOT be able to track inventory on an item by item basis, thereby requiring assumptions to be made as to which particular items of inventory were sold.