INVENTORY METHOD

PERIODIC - A periodic inventory system is a form of inventory valuation where the inventory
account is updated at the end of an accounting period rather than after every sale and purchase.
The method allows a business to track its beginning inventory and ending inventory within an
accounting period.

The following information belongs to Paradise Hardware Store:

Beginning inventory: 200 units at $12 = $2,400

Purchases made during the period: 1800 units at $12 = $21,600
Sales made during the period: 1200 units at $24 = $28,800
Ending inventory: 800 units at $12 = $9,600

Required: Make journal entries to record above transactions assuming a periodic inventory system is
used by Paradise Hardware Store.

Solution:
PERPETUAL - Perpetual inventory is a method of accounting for inventory that records
the sale or purchase of inventory immediately through the use of computerized point-of-
sale systems and enterprise asset management software. It provides a highly detailed
view of changes in inventory with immediate reporting of the amount of inventory in
stock, and accurately reflects the level of goods on hand. Within this system, a company
makes no effort at keeping detailed inventory records of products on hand; rather,
purchases of goods are recorded as a debit to the inventory database. 

RetailX LTD has made the following transactions during March:

In the perpetual inventory system, each purchase requires one entry to be made in the general journal. It is
recorded by debiting the inventory account and crediting accounts payable as follows:

In turn, each sale requires two entries to be made in the general journal. The first one is recorded by debiting
the accounts receivable account and crediting the sales account. The second one is recorded by debiting the
cost of goods sold account and crediting the inventory account.

FIFO - FIFO stands for “First-In, First-Out”. It is a method used for cost flow
assumption purposes in the cost of goods sold calculation. The FIFO method assumes
that the oldest products in a company’s inventory have been sold first. The costs paid
for those oldest products are the ones used in the calculation.
The journal entries to be made differ for the perpetual and periodic inventory system. Let’s assume
that RetailPro Ltd has made the following transactions during June:
AVERAGING - The average cost method assigns a cost to inventory items based on the
total cost of goods purchased or produced in a period divided by the total number of
items purchased or produced. The average cost method is also known as the weighted-
average method.

XYZ Ltd has made following transactions during the first quarter:

Multi step form Income statement with cost of good sold and Cost of Good manufactured:

Here is a sample income statement in the multiple-step format:

Using the above multiple-step income statement as an example, we see that there are three steps needed to
arrive at the bottom line Net Income:

Step 1.
Cost of goods sold is subtracted from net sales to arrive at the gross profit.

Step 2.
Operating expenses are subtracted from gross profit to arrive at operating income.

Step 3.
The net amount of nonoperating revenues, gains, nonoperating expenses and losses is combined with the
operating income to arrive at the net income or net loss.