Which inventory system requires a physical count to determine quantities on hand?

• A. Periodic inventory system
• B. Perpetual inventory system
• C. Cash-basis inventory
• D. Hybrid inventory system

Answer: (A)

In this topic, the key idea is how different inventory systems handle knowing how many units you actually have on hand. A periodic inventory system relies on a physical count to determine quantities on hand. It doesn’t continuously update the inventory balance with every sale or purchase. Instead, you record purchases to a separate Purchases account, and at the end of the period you perform a physical count to determine ending inventory. Then you compute cost of goods sold as beginning inventory plus purchases minus ending inventory. Because the on-hand quantity isn’t updated transaction-by-transaction, the physical count is essential to know what you truly have.

In contrast, a perpetual inventory system updates the inventory balance and cost of goods sold with each sale and each purchase, so you generally know exact quantities on hand without a full count, though periodic checks can be done for accuracy. Cash-basis inventory focuses on when cash is paid or received for recognizing those items, rather than how the inventory balance is tracked. A hybrid system mixes features but doesn’t override the fundamental requirement of a period-end physical count in the periodic approach.