Before the appraiser can accomplish an accuracy test of the inventory, the type of reporting system the company maintains needs to be understood. This is because it is from this system that subsequent testing documents will be supplied. The type of system being maintained could be either of the following:
1. A Periodic inventory system records all purchases to one account, and all sales to another. It is not until the end of the accounting period that these transactions are merged into an inventory account. Therefore, until that time, the inventory account does not reflect a true picture of the actual goods on-hand.
2. A Perpetual inventory system records each transaction at the time it occurs, thus maintaining actual inventory levels at all times. However, there are still instances where certain factors need to be considered for an appraiser to assess value. This is due to some companies, even when on a perpetual system, not recording the price of goods removed until the point of sale. This would have relevance when looking at the issue of lower-of-cost-or-market, as the discounted goods would need to be adjusted.
