Merchandising Operations and the Accounting Cycle - Pearson

EXHIBIT 5-13
Relationship Between the
Inventory Account and Cost
of Goods Sold in the Periodic
Inventory System (Amounts
for Austin Sound Centre Inc.)
248 Part One The Basic Structure of Accounting
Inventory
Beginning balance 38,600
Net purchases 87,200
Freight in 5,200 Cost of goods sold 90,800
Ending balance 40,200
This T-account shows that the perpetual and the periodic inventory
systems compute the same amounts for ending
inventory and for cost of goods sold:
• The perpetual system accumulates the balances of
Inventory and Cost of Goods Sold throughout the
period.
• The periodic system determines the correct amounts
for Inventory and Cost of Goods Sold only at the end
of the period.
The authors thank Betsy Willis for suggesting this exhibit.
returns and allowances. Subtract ending inventory, and the result is cost of goods sold
for the period. Exhibit 5-13 diagrams the alternative computation of cost of goods sold,
with Austin Sound Centre Inc. amounts used for the illustration.
The Decision Guidelines feature summarizes some key decisions of a merchandising
business. One key decision is how much inventory the business should purchase
in order to achieve its goals.
Here is how Frank Ernest, the manager of Austin Sound Centre Inc., would decide
how much inventory to buy (all numbers based on Exhibit 5-13):
1. Manager predicts Cost of goods sold for the period.................. $ 90,800
2. Manager predicts Ending inventory at the end of the period .. 40,200
3. Cost of goods available for sale = Sum of Ending inventory
Cost of goods sold........................................................................ 131,000
4. Subtract the period’s beginning inventory .................................. (38,600)
5. The difference is the amount of inventory to purchase
(including Freight in) during the coming year............................ $ 92,400