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# Perpetual and Periodic Inventory Systems

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1/1 Beginning Inventory 1,000 Units @ \$10 per Unit
3/15 Purchase of Inventory 3,500 Units @ \$12 Per Unit
7/21 Sale of Inventory 4,000 units
9/12 Purchase of Inventory 1,600 Units @ \$14 per unit
10/31 Sale of Inventory 1,200 Units.

A. Using LIFO, what is the Cost of Goods Sold using the Perpetual Method? What is the Cost of Goods Sold using the Periodic Method? What is the cost of ending inventory for each method?

B. Is there a difference in the Net Income for each Method? Why?

C. What are the advantages of using each method?

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A.
Using the Perpetual LIFO system, we will maintain a accurate count on the cost of goods sold at each transaction.

Cost of goods sold
At 7/21, 3,500 units at \$12 per unit = \$42,000 (those units are purchased at 3/15)
500 units at \$10 per unit = \$5,000 (those units were in the beginning inventory)
At 10/31, 1,200 units at \$14 per unit = \$16,800 (those units are purchased at 9/12)
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Total \$63,800

Using the periodic method, we would perform an ending inventory count, then assign appropriate per unit cost for the left over unit
At the inventory count, there should be (1000 units from beginning inventory + 3500 units purchased + 1600 units purchases) - (4000 units sold + 1200 units sold) = 900 units
Since we are using LIFO, we would assume the unit cost for the 900 units is the earliest cost at \$10 unit per unit
So the ending merchandise balance is 900 units * \$10 per unit = \$9000

The total merchandise available for sales is 1000 units * \$10 + 3500 units * \$12 + 1600 units * \$14 = \$74400

The cost of goods sold = beginning merchandise available - ending merchandise = \$74400 - \$9000 = \$65,400

B.
Yes, there will be a difference between the two methods because the cost of goods sold figures are different.
Under the perpetual method, the cost of goods sold is \$63,800
Under the periodic method, the cost of goods sold is \$65,400
Therefore, the net income under the periodic method will be smaller than that in the perpetual method, assuming everything else remains constant.

The reason behind the difference is due to the different cost mixture left under the two different methods,
Under the perpetual method, at the end of the period, we have
500 units at \$10 per unit and 400 units at \$14 per unit

Under the periodic method, all the 900 units left is assumed to be at costs of \$10 per unit.

C.
Advantages for the perpetual system: This method matches more closely with the reality. The last unit comes in is usually the fast unit goes out in many business settings. With the bar-code technology, retail stores can track the inventory in real time and therefore assign the real corresponding unit cost at each transaction. Management will have a better understanding and control of their inventory under this system

Advantages for the periodic system: This method will usually yield a higher cost of good sold, as demonstrated in this question. With a higher cost of goods sold, the company will result in a lower taxable income and lower tax expenses.

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