Which of the following is used to determine the cost of goods available for sale periodic inventory )?
A periodic inventory system only updates the ending inventory balance in the general ledger when a physical inventory count is conducted. Since physical inventory counts are time-consuming, few companies do them more than once a quarter or year. In the meantime, the inventory account in the accounting system continues to show the cost of the inventory that was recorded as of the last physical inventory count. Show
Under the periodic inventory system, all purchases made between physical inventory counts are recorded in a purchases account. When a physical inventory count is done, the balance in the purchases account is then shifted into the inventory account, which in turn is adjusted to match the cost of the ending inventory. The calculation of the cost of goods sold under the periodic inventory system is: Beginning inventory + Purchases = Cost of goods available for sale Cost of goods available for sale – Ending inventory = Cost of goods sold For example, Milagro Corporation has beginning inventory of $100,000, has paid $170,000 for purchases, and its physical inventory count reveals an ending inventory cost of $80,000. The calculation of its cost of goods sold is: $100,000 Beginning inventory + $170,000 Purchases - $80,000 Ending inventory = $190,000 Cost of goods sold Periodic Inventory AccountingUnder a periodic inventory system, inventory purchases made by a company are initially stored in a purchases (asset) account with the following journal entry: There may be a number of these entries during an accounting period, which gradually increases the amount in the purchases account. At the end of the accounting period, the entire balance in the purchases account is shifted into the inventory (asset) account. This means that the purchases account is really an accumulation account for a single accounting period, rather than an account that holds a balance over multiple periods. The entry at the end of the period is:
The final periodic inventory entry in an accounting period arises immediately after the physical count of the inventory, when the accounting staff establishes the actual cost of the inventory on hand at the end of the month. It then subtracts this actual ending inventory cost from the cost that has accumulated in the inventory account, and charges the difference to the cost of goods sold account with this entry:
Periodic Inventory System Advantages and DisadvantagesThe periodic inventory system is most useful for smaller businesses that maintain minimal amounts of inventory. For them, a physical inventory count is easy to complete, and they can estimate cost of goods sold figures for interim periods. However, there are several problems with the system:
How do you calculate cost of goods available for periodic inventory?The cost of goods sold formula is calculated by adding purchases for the period to the beginning inventory and subtracting the ending inventory for the period.
How do you find the cost of goods available for sale?To calculate the cost of goods available for sale, you add the total value of current inventory to the cost of producing that inventory. For example, if a business has $5,000 worth of products that are ready to sell and those products cost $3,000 to produce, their total cost of goods available to sell is $8,000.
What accounts are used in a periodic inventory system?Under the periodic inventory system, all purchases made between physical inventory counts are recorded in a purchases account. When a physical inventory count is done, the balance in the purchases account is then shifted into the inventory account, which in turn is adjusted to match the cost of the ending inventory.
How does the periodic inventory accounting method track inventory and cost of goods sold?This accounting method takes inventory at the beginning of a period, adds new inventory purchases during the period and deducts ending inventory to derive the cost of goods sold (COGS).
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