Hello Class,

The physical inventory is the amount of goods the business has on hand. A physical inventory is usually obtained at the end of an accounting period by physically counting the inventory. This helps the business know if the physical inventory matches the quantity of inventory reported in the financial statements. Errors can be made when counting physical inventory, which would lead to mistakes on the financial statements. Most commonly, merchandise in transit, errors in counting, or cost method was improperly assigned. The text states that inventory mistakes usually fix themselves within 2 years. If using the periodic inventory system, physical inventory counts at the end of each month are needed to produce the financial statements.

The financial analysis is always a little hard to understand at first until you understand the math behind the calculations fully. Mostly I found myself wondering why would anyone use the LIFO method? I understand that it can lead to a tax break, but I feel this could lead to bigger problems in the future. It may help on the current accounting period but would end up being a long term problem if all inventory on hand was sold at a later date.

Jessi,

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