Quiz 6: Inventories


We have been asked to evaluate the professionalism in R's behavior. From a statutory perspective there does not appear to be anything incorrect. The orders have already been placed, there is no mentioning of anything wrong in accounting or valuation and the pressure exerted to meet the targets is merely internal ie within the company. From the controllers and company's perspective it appears professional as it is expected to improve the company's sales and income. It would also improve the company's reputation among its customers as their orders would be serviced at a brisk pace. The only strain would be on the shipping department. The staff may be rewarded accordingly.

Inventory purchases: Inventory purchases mean the inventory that has been purchased from outside vendors as per the requirements of production. The amount of inventory purchases to be recorded in the books of accounts is the cost incurred to purchase the inventory. Cost incurred to purchase inventory is the cost paid to the vendor for acquiring the inventory. Accounting for inventory purchases: Before recording the amount of inventory purchases in the books of accounts, the receiving report of the inventory is to be reconciled with the relevant documents. It is reconciled to record the purchase at correct amount. The relevant documents used to reconcile with the receiving report are purchase order and the vendor invoice. The purchase order is the order of the requirements of the inventory made by the company to vendor. Vendor invoice is the invoice sent by the vendor for the amount due by the company. The purchase order and the vendor invoice is reconciled with the receiving report because the excess inventory or the less inventory received will be returned or additional order can be raised to the vendor. If the inventory received is not as per the requirements of the company then it will be returned to the vendor. This process of reconciliation is adapted in order to avoid many entries in the books of accounts. Thus, the relevant documents to reconcile with the receiving report are purchase order and vendor invoice.

Yes, Switching to perpetual inventory system will strengthen H store's control over Inventory items. Because when the periodic inventory system is used, only revenue is recorded each time a sale is made. No entry is made at the time of the sale to record the cost of merchandise sold. At the end of accounting period, a physical inventory is taken to determine the cost of the inventory and cost of merchandise sold. But in perpetual inventory system, entry to record the cost of merchandise sold is made at the time of merchandise sold and this system also tells daily balance with the total cost of inventory held. So if you have daily information about your inventory you can control it in a better way. But switching to perpetual inventory system cannot eliminate the need for a physical inventory count because to make sure that the quantity of inventory reported in financial statements is accurate. It gives the report of inventory loss or any error due to theft or any other reason.

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