Use of perpetual inventory

system
Research Activity
Financial Accounting (MBA-528)
Contents
 Introduction to the topic
 Perpetual inventory system
 Method of controlling perpetual inventory

system
 Use of perpetual inventory system
 Case study
 Conclusion

Assignment#2 Financial
Accounting(MBA-528) 2
Introduction
 Manufacturing companies use three types of
inventory:
 Material
 Work in process

 Finished goods

Merchandising means selling products to retail

customers, merchandisers also called retailers.
Retailers have one inventory: merchandise.
inventory is something the company will re-sell
to someone else.

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Accounting(MBA-528) 3
Introduction (cont..)
 Inventory cost is an asset until it is sold
 After merchandise is sold, the cost becomes

an expense generally called Cost of Goods

Sold(COGS).
 Retailers deal with an inventory: all the goods

(products) they have for sale. They account

for inventory purchases and sales in one of
two ways: Periodic and Perpetual.

Assignment#2 Financial
Accounting(MBA-528)
 In Periodic system , inventory account
balances are updated once a year.
under this system, merchandise purchases
are recorded in the purchase account, and the
inventory account balance is updated only at
the end of each accounting period.
 In perpetual inventory system, inventory

account balances are updated on continuous

basis

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Accounting(MBA-528) 5
Perpetual inventory system
 Describe systems of inventory in which the
inventory are recorded or displayed in the firm
or organization's information system is updated
on a continuous basis with real inventory in
stock.
 Under this system, purchases, purchase returns
and allowances, purchase discounts, sales and
sales returns are immediately recognized in the
inventory account, so the inventory account
balance should always remain accurate and
updated.

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Accounting(MBA-528) 6
Method of controlling
perpetual inventory system
 A method of controlling physical stock level
by ensuring the amount of stock level of
every item could be accounted at all times.
This normally involves detailed recording of
all receipts, issues and running balances for
each item of stock.
 Basically, there are two types of physical

stocktaking:
◦ Continuous stocktaking
◦ Period stocktaking

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Accounting(MBA-528) 7
Method of controlling
perpetual inventory system
(cont..)
 Continuous stocktaking
In continuous stocktaking, the continual
physical count of the quantity of the stock.
The physical quantities counted are then
compared to the stock recorded under the
perpetual inventory system.
 Periodic stocktaking

Unlike continuous stocktaking, the stocks are

physically counted only at the end of the
accounting year.
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Accounting(MBA-528) 8
Inventory valuation

 Company requires to know the correct value

of merchandise sold, and that cost is used to
determine the Gross Profit.
 There are four methods of inventory

valuation:
◦ Specific identification
◦ First in first out (FIFO)
◦ Last in first out (LIFO)
◦ Average cost

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Accounting(MBA-528) 9
Inventory valuation (cont..)
‣ Specific identification; the cost of each individual
inventory item is tracked separately; the exact cost
of each item is used in the value of ending inventory
‣ First in first out (FIFO); cost of earliest purchases
flow to COGS; we assume that the items remaining at
the end are the last ones bought in the year
‣ Last in first out (LIFO); cost of last purchases flow to
COGS; we assume that the items remaining at the
end are the earliest ones bought in the year
‣ Average cost; cost of items bought are averaged
across the year; the average cost is used at the end
of the year; a moving weighted average is sometimes
used
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Accounting(MBA-528) 10
Use of perpetual inventory
system
 It is used to track each and every purchase
and sale of inventory.
 It can be used by installing a digital

computerized system
 The inventory records are continuously

updated, along with the inventory value. 

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Accounting(MBA-528) 11
Case study
 Getz Pharma Pakistan
Background:
The largest Pakistan's pharmaceutical
company, started in 1995.
It is at the 6th position among 650 companies.
It is associated with Muller & Phipps, the
largest distribution company of Pakistan, with
1200 employees working at 23 locations in
Pakistan, with coverage of 33,000 retail
outlets.

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Accounting(MBA-528) 12
Case study (cont..)
 Getz pharma is using the perpetual inventory
system.
 The company is currently using the

computerized accounting system Integrated

Oracle E-Business suite software for
maintaining the daily records of each
transaction.

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Accounting(MBA-528) 13
Reason to use Perpetual
Inventory system
 Due to the requirement of time, company
needs to have quick access on its
manufacturing department stock position.
 It provides up to date information regarding

stock or inventory level.

 Company needs current information to

organize their inventories of raw material

with their production schedule.
 It provides the immediate information

through computerized accounting system.

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Accounting(MBA-528) 14
Reason to use Perpetual
Inventory system (cont..)
 It provides ease to maintain the inventories on timely
manner. This can lead the company to grow its productivity.
 It also provides detailed information regarding the
manufacturing units.
 If some discrepancies occurred due to breakages and
spoilage then it is easy to find out as well to recover the
loss.
 For developing planned strategies for sale, it is required to
have complete knowledge about the inventory level in the
production dept.
 Perpetual inventory system presents a genuine professional
means for recording of each item in operating
circumstances.

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Accounting(MBA-528) 15
Conclusion
 It is more commonly used because of
scanner devices.
 It provides continual information regarding

what was sold, where and when it was sold

and at what price.
 This system tells us what should be on hand,

it knows when we started with, what we

purchased, and what we sold.
 This system still requires a choice of

valuation methods.

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Accounting(MBA-528) 16