Business types using the periodic inventory system include companies that sell relatively few inventory units each month such as art galleries and car dealerships.

Which cost flow assumptions can the periodic inventory system use?

For a periodic system, the cost flow assumption is only applied when the physical inventory count is taken and the cost of the ending inventory is determined. In a perpetual system, each time a sale is made the cost flow assumption identifies the cost to be reclassified to cost of goods sold.

How do you calculate cost of goods sold using the periodic inventory system?

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.

Why would a small business use a periodic inventory system?

A periodic inventory system is best suited for smaller businesses that don’t keep too much stock in their inventory. For such businesses, it’s easy to perform a physical inventory count. It’s also far simpler to estimate the cost of goods sold over designated periods of time.

How do you do 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 are cost of goods sold and ending inventory calculated?

When perpetual methodology is utilized, the cost of goods sold and ending inventory are calculated at the time of each sale rather than at the end of the month. For example, in this case, when the first sale of 150 units is made, inventory will be removed and cost computed as of that date from the beginning inventory.

When does the periodic inventory system update the balance sheet?

As you’ve learned, the periodic inventory system is updated at the end of the period to adjust inventory numbers to match the physical count and provide accurate merchandise inventory values for the balance sheet.

What was the merchandise inventory at the end of the period?

Beginning merchandise inventory had a balance of $3,150 before adjustment. The inventory at period end should be $8,955, requiring an entry to increase merchandise inventory by $5,895. Journal entries are not shown, but the following calculations provide the information that would be used in recording the necessary journal entries.

How does the specific identification costing assumption work?

The specific identification costing assumption tracks inventory items individually, so that when they are sold, the exact cost of the item is used to offset the revenue from the sale.