Question 2 (b)

Significance of inventory valuation; periodic versus perpetual systems

4 marks

Time to write: About 8 minutes

From an older CBCS paper

Question

Question 2 (b) · 4 marks

Why is inventory valuation significant ? How does the Periodic System of Inventory Valuation differ from the Perpetual System ? 4

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

8 minfor 4 marks

Read from the question

WhyReasons, not a description: each reason explained in a line or two.
differSet the differences out in a table, basis by basis, not as two separate essays.

Write it in this order

Read; underline the asks; jot your points 1 min
1 Significance of inventory valuation 2 marks 3 min
2 Periodic versus perpetual systems 2 marks 3 min
Check: every ask answered, key terms underlined 1 min

Short on time? Trim steps 1 and 2 evenly rather than skip one: each is capped at its own marks.

Try it first. About 8 minutes for 4 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Significance of inventory valuation. Inventory is generally the most important current asset of a trading or manufacturing firm, often 75% or more of current assets. Its valuation matters because:

Determination of income: cost of goods sold = opening inventory + purchases + direct expenses − closing inventory; an overstated closing stock overstates profit, and an overstated opening stock understates it.
Financial position: closing inventory appears on the asset side of the balance sheet, so its value affects current assets, working capital and the liquidity ratios.
Comparability and tax: consistent valuation keeps profits comparable from year to year and is the basis of taxable profit.

Periodic versus perpetual systems

Point	Periodic system	Perpetual system
Recording	Purchases are debited to a Purchases account; the inventory account is not updated during the period	Every purchase and issue is recorded in the inventory (stores) records as it occurs
Closing inventory	Found by a physical count at the end of the period	Available from the records at any time; checked by periodic counts
Cost of goods sold	A residual: opening inventory + purchases − closing inventory	Recorded with each sale (Cost of Goods Sold Dr, Inventory Cr)
Losses and shortages	Hidden in the cost of goods sold	Revealed by comparing the records with physical counts
Suitability	Small firms with many low-value items	Large firms and high-value items; needs more record-keeping

Where the 4 marks sit

#	Component	Marks
1	Significance of inventory valuation	2
2	Periodic versus perpetual systems	2
	Total	4

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