Physical Inventory

1. Understand the necessity of taking a physical inventory even in a perpetual inventory system.

2. Estimate the amount of inventory on hand using historic gross profit percentages and identify the situations when this computation might be necessary.

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Question: In a periodic inventory system, a physical count is always taken at or very near the end of the fiscal

year. This procedure is essential. There is no alternative method for determining the final inventory figure and,

hence, the cost of goods sold for the period. When a company uses a perpetual system, is a count of the goods on

hand still needed since both the current inventory balance and cost of goods sold are maintained and available in

the accounting records?

Answer: A physical inventory is necessary even if a company has invested the effort and cost to install a perpetual

system. Goods can be lost, broken, or stolen. Errors can occur in the record keeping. Thus, a count is taken on a

regular basis simply to ensure that the subsidiary and general ledger balances are kept in alignment with the actual

items held. Unless differences become material, this physical inventory can take place at a convenient time rather

than at the end of the year. For example, assume that a company sells snow ski apparel. If a perpetual system is in

use, the merchandise could be inspected and counted by employees in May when quantities are low and damaged

goods easier to spot.