Sample Essay

Particulars Units Rate Total Cost
Sales 1,600 14 22,400
Sales 3,500 12 42,000
100 10 1,000
5,200 65,400

Cost of goods sold (5,200 units) = $65,400

Merchandise Inventory – balance at December 31

December 31 – Merchandise Inventory = Cost of goods available for sale – cost of goods sold

December 31 – Merchandise Inventory = 74,400 – 65,400

Cost of Ending Inventory (900 units) = $9,000

C.

Computation of Net Income
Perpetual Periodic
Sales 85,000 85,000
Less: Cost of Goods Sold (63,800) (65,400)
Gross Profit 21,200 19,600
Less: Operating Expenses (5,600) (5,600)
Net Income 15,600 14,000

The advantage of using perpetual inventory system is that the net income of the company on the income statement is reported at a higher level and the level of ending inventory on balance sheet is also higher which increases the net worth of the company and makes it attractive for potential investors. The advantage of using periodic inventory system on the other hand lowers the net income on tax returns which eventually lowers the tax expense for the company.

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