Question 1 (b)
Perpetual versus periodic methods of valuing inventory
4 marks
- Time to write
- About 8 minutes
From an older CBCS paper
Question
Question 1 (b) · 4 marksQ.1 (b) Distinguish between the perpetual and periodic methods of valuing inventory. [4 Marks]
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
Read from the question
- Distinguish betweenSet 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 Meaning of each system 1½ marks 1 min
- 2 Points of difference 2½ marks 6 min
Easy marks
- Meaning of each system (step 1, 1½ marks): a clear definition and a line on what it covers. It opens the answer, so it takes a minute or two.
Short on time? Cut step 2 short rather than leave anything out.
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.
Under the periodic system the inventory account is not updated during the period: purchases are debited to a Purchases account, and the inventory is adjusted at the year end, cost of goods sold being the balancing figure. Under the perpetual system the inventory account changes constantly, with every receipt and issue; at each sale, Cost of Goods Sold is debited and Inventory credited, an entry not made under the periodic system. So the inventory balance and the cost of goods sold are known at any time.
| Point | Perpetual system | Periodic system |
|---|---|---|
| Recording | Continuous: each receipt and issue entered in the stock records | Only purchases recorded during the period |
| Closing stock | Available from the records at any time, verified by periodic counts | Found only by physical count at the period end |
| Cost of goods sold | Recorded with each sale (Cost of Goods Sold Dr, Inventory Cr) | Residual: opening + purchases − closing |
| Control | Losses, theft and shortages revealed by comparing records with counts | Losses hidden in the cost of goods sold |
| Cost and suitability | More records and cost; suits large firms and high-value items | Simple and cheap; suits small firms and low-value items |
Where the 4 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Meaning of each system | 1.5 |
| 2 | Points of difference | 2.5 |
| Total | 4 |
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