Page 285 - Accounting Principles (A Business Perspective)

Item TV-96874 Maximum 26
Location Minimum 6

Purchased Sold Balance
2008 Unit Total Unit Total Unit Total
Date Units Cost Cost Units Cost Cost Units Cost Cost
Beg. inv. 8 $300 $2,400
July 5 10 $300 $3,000 18 300 5,400
7 12 $300 $3,600 6 300 1,800
12 10 315 3,150 6 300 1,800
22 6 300 1,800 10 315 3,150
2 315 630
24 8 320 2,560 8 315 2,520
315 2,520
8 320 2,560
Exhibit 48: Perpetual inventory record (FIFO menthod)

The availability of inventory management software packages is causing more and more businesses to change
from periodic to perpetual inventory procedure. Under perpetual inventory procedure, companies have no
Purchases and purchase-related accounts. Instead, they make all entries involving merchandise purchased for sale
to customers directly in the Merchandise Inventory account. Thus, they debit or credit Merchandise Inventory in
place of debiting or crediting Purchases, Purchase Discounts, Purchase Returns and Allowances, and
Transportation-In. At the time of each sale, firms make two entries: the first debits Accounts Receivable or Cash
and credits Sales at the retail selling price. The second debits Cost of Goods Sold and credits Merchandise Inventory

at cost. Therefore, at the end of the period the Merchandise Inventory account shows the cost of the inventory that
should be on hand. Comparison of this amount with the cost obtained by taking and pricing a physical inventory
may reveal inventory shortages. Thus, perpetual inventory procedure is an important element in providing internal
control over goods in inventory.
Perpetual inventory records Even though companies could apply perpetual inventory procedure manually,
tracking units and dollars in and out of inventory is much easier using a computer. Both manual and computer
processing maintain a record for each item in inventory. Look at Exhibit 48, an inventory record for Entertainment
World, a firm that sells many different brands of television sets. This inventory record shows the information on
one particular brand and model of television set carried in inventory. Other information on the record includes (1)

the maximum and minimum number of units the company wishes to stock at any time, (2) when and how many
units were acquired and at what cost, and (3) when and how many units were sold and what cost was assigned to
cost of goods sold. The number of units on hand and their cost are readily available also. Entertainment World
assumes that the first units acquired are the first units sold. This assumption is the first-in, first-out (FIFO) method
of inventory costing; we will discuss it later.

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