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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