Otto Sounds, Inc., a specialty retailer of customized audio systems for automobiles, installed a perpetual inventory system in the second quarter of 20x3. The new system allowed the firm to adjust its merchandise inventories to sales patterns more effectively and to prepare monthly financial statements. Although the system led to an improvement in sales and income, the gross margin on the monthly income statements was falling below both management's expectations and the industry average. At the end of 20x8, a physical inventory revealed that actual merchandise inventory was considerably lower than the perpetual inventory records indicated. The merchandise inventories of some stores were off more than others, but all had deficiencies. What probably caused these losses and what steps could be taken to prevent them in the future?

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The Answer of Otto Sounds, Inc., a specialty retailer of customized audio systems for automobiles, installed a perpetual inventory system in the second quarter of 20x3. The new system allowed the firm to adjust its merchandise inventories to sales patterns more effectively and to prepare monthly financial statements. Although the system led to an improvement in sales and income, the gross margin on the monthly income statements was falling below both management's expectations and the industry average. At the end of 20x8, a physical inventory revealed that actual merchandise inventory was considerably lower than the perpetual inventory records indicated. The merchandise inventories of some stores were off more than others, but all had deficiencies. What probably caused these losses and what steps could be taken to prevent them in the future?