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“Inventory could be under or overstated if the perpetual inventory counts are not complete.”
ma’am how can inventory be overstated if perpetual inventory count is not complete? I thought is was obvious that inventory will ALWAYS be understated if perpetual inventory count was incomplete, until of course i came across this sentence in my kaplan kit.
See what I wrote in this post https://opentuition.com/topic/continuous-perpetualinventory-count
The purpose of periodic counting is not to count the actual physical inventory that will be included in the financial statements at the reporting date. The inventory counted in January may be sold by May – the inventory counted in August may be sold by November. Its a SYSTEM of control.
Counts during the year will be “floor to book” and “book to floor” – of course, in an ideal situation, they should agree. But they won’t. And part of the system of control is that discrepancies.
Suppose there are 3 products counted as follows:
A131 – 100 units
A132 – 200 units
A133 – 300 units
But the book records show:
A131 – 50 units
A132 – 200 units
A133 – 350 units
There is a +50 “over” discrepancy on A131 and a -50 “under” discrepancy on A133. Management can’t just “write-off” the differences – or leave them unresolved. A perfectly reasonable explanation is that 50 units of A133 have been included in the count of A131 (i.e. count quantity needs to be corrected) – or that a sale of 50 units of A133 has been recorded on a GDN as A131 (i.e. book quantities need to be corrected).