EX 7-1 Control of inventories
A4A Hardware Store currently uses a periodic inventory system. Ray Ballard, the owner,
is considering the purchase of a computer system that would make it feasible to switch
to a perpetual inventory system.
Ray is unhappy with the periodic inventory system because it does not provide timely
information on inventory levels. Ray has noticed on several occasions that the store runs
out of good-selling items, while too many poor-selling items are on hand.
Ray is also concerned about lost sales while a physical inventory is being taken. A4A
Hardware currently takes a physical inventory twice a year. To minimize distractions, the
store is closed on the day inventory is taken. Ray believes that closing the store is the
only way to get an accurate inventory count.
Will switching to a perpetual inventory system strengthen A4A Hardware’s control
over inventory items? Will switching to a perpetual inventory system eliminate the need
for a physical inventory count? Explain.
Answer:
Switching to a perpetual inventory system will strengthen A4A Hardware’s internal controls over inventory, since the store managers will be able to keep track of how much of each item is on hand. This should minimize shortages of goodselling items and excess inventories of poor-selling items.
On the other hand, switching to a perpetual inventory system will not eliminate the need to take a physical inventory count. A physical inventory must be taken to verify the accuracy of the inventory records in a perpetual inventory system. In addition, a physical inventory count is needed to detect shortages of inventory due to damage or theft.
is considering the purchase of a computer system that would make it feasible to switch
to a perpetual inventory system.
Ray is unhappy with the periodic inventory system because it does not provide timely
information on inventory levels. Ray has noticed on several occasions that the store runs
out of good-selling items, while too many poor-selling items are on hand.
Ray is also concerned about lost sales while a physical inventory is being taken. A4A
Hardware currently takes a physical inventory twice a year. To minimize distractions, the
store is closed on the day inventory is taken. Ray believes that closing the store is the
only way to get an accurate inventory count.
Will switching to a perpetual inventory system strengthen A4A Hardware’s control
over inventory items? Will switching to a perpetual inventory system eliminate the need
for a physical inventory count? Explain.
Answer:
Switching to a perpetual inventory system will strengthen A4A Hardware’s internal controls over inventory, since the store managers will be able to keep track of how much of each item is on hand. This should minimize shortages of goodselling items and excess inventories of poor-selling items.
On the other hand, switching to a perpetual inventory system will not eliminate the need to take a physical inventory count. A physical inventory must be taken to verify the accuracy of the inventory records in a perpetual inventory system. In addition, a physical inventory count is needed to detect shortages of inventory due to damage or theft.
