The Cost of Goods Sold is reported on the Income Statement under the perpetual inventory method.Ī purchase return or allowance under perpetual inventory systems updates Merchandise Inventory for any decreased cost. The Merchandise Inventory account balance is reported on the balance sheet while the Purchases account is reported on the Income Statement when using the periodic inventory method. This count and verification typically occur at the end of the annual accounting period, which is often on December 31 of the year. Under a periodic inventory system, Purchases will be updated, while Merchandise Inventory will remain unchanged until the company counts and verifies its inventory balance. When a company uses the perpetual inventory system and makes a purchase, they will automatically update the Merchandise Inventory account. ![]() There are some key differences between perpetual and periodic inventory systems. Keeping in mind considerations such as gross profit, inventory turnover, meeting demand, point-of-sale systems, and timeliness of accounting information, what other accounting challenges might arise regarding the company’s inventory accounting processes? As inventory will represent one of the largest items on the balance sheet, it is vital that Gearhead management take due care with decisions related to inventory accounting. These are all accounting challenges Gearhead faces with respect to inventory. What is the correct cost flow assumption for Gearhead to accurately account for inventory? Should it use a first-in, first-out method, or last-in, first-out? ![]() Did Gearhead match the cost of sale with the sale itself? Was only inventory that belonged to the company as of the period end date included? Did Gearhead count all the inventory? Perhaps some goods were in transit (on a delivery truck for a sale just made, or en route to Gearhead). In accounting for inventory, matching principle, valuation, cutoff, completeness, and cost flow assumptions are all important. Proper application of accounting principles is vital to keep accurate books and records.
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