Inventory Systems
Identify the Inventory System
State whether Periodic or Perpetual
Inventory updated at year-end only
➛ Periodic
Used by supermarkets
➛ Perpetual
COGS calculated using a formula
➛ Periodic
Inventory reduced at time of sale
➛ Perpetual
Requires continuous record keeping
➛ Perpetual
Fill in the Blanks
1. Under a perpetual inventory system, inventory is updated continuously.
2. Under a periodic inventory system, COGS is calculated at period-end.
3. Shrinkage is discovered through a physical count.
COGS Calculation | Periodic
A business has
Choose the most appropriate action
➛ Beginning Inventory = 4,000
➛ Purchases = 12,000
➛ Ending Inventory = 3,500
Task
Calculate Cost of Goods Sold.
Formula
COGS = Beginning Inventory + Purchases – Ending Inventory
Calculation
COGS = 4,000 + 12,000 – 3,500
COGS = 12,500
Cost of Goods Sold = 12,500
Periodic Inventory System
A business sells goods costing 2,000 for 3,200 cash.
Record sales only | no COGS entry at time of sale
Cash
Sales Revenue
Sales Revenue
Dr 3,200
Cr 3,200
Cr 3,200
COGS is recorded later at period-end.
Perpetual Inventory System
A business sells goods costing 2,000 for 3,200 cash.
1. Record sales revenue
2. Record cost of goods sold
Cash
Sales Revenue
Cost of Goods Sold
Inventory
Sales Revenue
Cost of Goods Sold
Inventory
Dr 3,200
Cr 3,200
Dr 2,000
Cr 2,000
Cr 3,200
Dr 2,000
Cr 2,000
Mini Case Study
A clothing store wants to improve inventory control. Currently, it only updates inventory at the end of the year and experiences frequent stock losses.
Questions
Which inventory system is the store using?
➛ Periodic inventory system
What problems does this system cause?
➛ Stock losses go unnoticed
➛ Poor inventory control
➛ Inaccurate inventory records
➛ Delayed detection of theft or damage
Which inventory system should the store adopt? Why?
➛ Perpetual inventory system
Because it
➛ Tracks inventory in real time
➛ Reduces losses
➛ Improves control and accuracy
How would this change affect COGS recording?
➛ COGS would be recorded at the time of each sale, not at period-end.
How would it improve financial reporting?
➛ More accurate inventory values
➛ More reliable profit figures
➛ Timely financial information for decision-making
Quick Quiz
What is an inventory system?
➛ A method used to record, track, and manage inventory and cost of goods sold.
Name the two main types of inventory systems.
➛ Periodic
➛ Perpetual
COGS is recorded only at period-end under the perpetual system.
➛ False
Which system provides more accurate inventory records?
➛ Perpetual inventory system
What formula is used to calculate COGS under the periodic system?
➛ Beginning Inventory + Purchases – Ending Inventory
FIFO ➧ Here