Question

(a). A company can choose to use a variety of inventory valuation methods under GAAP. Would the use of one certain method require more testing of controls than another method? Why or why not?

(b) Why is a physical count taken under both a perpetual and periodic inventory system?

(c) Do you think the same level of controls are needed for period and perpetual systems?

Answer 1

a) There are various methods to value inventory. In the absence of information on GAAP in given question, All the below inventory valuation methods are allowed-

1. First in first out(FIFO)
2. Last in first out(LIFO)
3. Weighted average cost method
4. Specific identification method

All the methods are having advantages and disadvantages. But its company choice to choose any method suitable for them. Specific identification method requires more testing of control than other methods as the company needs to keep trqck of inventory which is purchased and when the same is sold especially if company is involved in business selling interchangeable goods.

b) In perpetual inventory system, the inventory rexords are maintained and upadtaed as and when there is movement in inventory. But in periodic method, the physical verification of inventory is done on periodic intervals and uodated in records accordingly.

c) The same level of internal control is not required in both perpetual and periodic inventory system. More internal control is required in periodic system as the invenotry records are not maintained in this system as and when there is movement in inventory. So its difficult to track inventory movement if proper internal controls are not there.