Answer to Question #216111 in Accounting for zuby

Question

Costello Corporation uses a perpetual inventory system. At the end of the year, the inventory balance

221 Financial Accounting

reported by its system is $45,270. Costello performs an inventory count and determines that the actual ending inventory is $39,780.

1.

Discuss why a company that uses a perpetual inventory system would perform a physical inventory count.

2.

Why might the ending balance in inventory differ between the perpetual inventory system and physical inventory count?

3.

Assume that Costello determines that the difference is due to a part of its inventory being damaged when a warehouse worker backed into a shelf with his forklift. What journal entry should Costello make?

4.

Assume that Costello believes the difference is due to errors made by its accounting staff. The staff failed to transfer inventory to cost of goods sold when sales were made. Record the journal entry Costello should make in this case.

Answer 1

1.Companies that use a perpetual system may still conduct an annual physical inventory. In the periodic inventory system, physical counts are used to determine the amount of goods sold. In the perpetual system, a year-end physical inventory validates the inventory records.

2.Perpetual inventory continuously tracks and records items as they are added to or subtracted from the inventory. And it keeps track of the cost of goods purchased and sold. Physical inventory uses a periodic schedule to manually count and record items and keep track of the cost of what's bought and sold.

3.

4.