Question

Jason Tierro, an inventory clerk at Lexmar Company, is responsible for taking a physical count of the goods on hand at the end of the year. He has been performing this duty for several years. This year Jason was very busy due to a shortage of personnel at the company, so he decided to just estimate the amount of ending inventory instead of doing an accurate count. He reasoned that he could come very close to the true amount because of this past experience working with inventory. Besides, he was sure that the sophisticated computer program that Lexmar had just invested in kept an accurate count of inventory on hand.

1. What is your opinion of Jason's reasoning? Why?

2. If Jason underestimates the dollar amount of ending inventory, what effect will it have on net income for the current accounting period?

3. Since the perpetual inventory system maintains an up-to-date balance in the general ledger account for Merchandise Inventory, is a physical inventory count still necessary? Why?

Answer 1

1. Physical count cannot replaced by any other method. The very purpose of physical count is to ensure that book inventory matches physical one. Physical inventory taking ensure that inventory shown on balance sheet is actually there. For example..Pilferage of inventory can't be caught by any other method however good it is.

2. Net income will be under stated as cost of production will increase.

3. Perpetual inventory is still an accounting method and cannot replace Physical count as mentioned in first point above.