For Companies That Use A Perpetual Inventory System, All Of The Following Are Purposes For Taking A Physical Inventory Except To:

The correct option of this multiple choice question (mcq) is (D), as the basic purpose of physical counting of Inventory (I) is to check the actual inventory on hand and to compare it with inventory on hand recorded in books of accounts in order to check errors or mistakes made in recording inventory, wastage of raw materials and goods and losses occurred due to theft.

Which Accounts Are Affected By Inventory Shrinkage (IS)?

The company using Perpetual Inventory System (PIS) needs to make adjustment for IS. The shrinkage of inventory is charged to cost of goods sold. The adjusting entry (in which two accounts are affected) to record for such case is shown below:

Cost of Goods a/c XXX

                        Inventory a/c XXX

(IS Recorded To Update Inventory Value By Physical Counting)

By taking physical counting of merchandise, the company recorded true and accurate value of merchandise on hand. The purpose of physical counting of merchandise is not to determine the cost of goods sold and gross profit but after the completion of physical counting, the company also gets correct and actual figures of cost of goods sold and gross profit for the accounting period.

The physical counting of goods on hand helps in detecting frauds also. If an employee intentionally theft the goods, he may be get caught, so he should work honestly.

For a manufacturing company during the production process, there are chances that some materials may be damaged, so physical counting is much needed once in a year for such company which uses perpetual inventory system.

Due to errors or mistakes, the Inventory Value (IV) recorded in books of accounts may be increased or decreased when compare it with actual IV. If this value is more than the actual value on hand, then there is a loss as the actual IV is fallen and when it is less than the actual value on hand, then there is a revenue for the company during the current accounting period as the actual IV is increased.