Which inventory system requires that the inventory account be updated when merchandise is purchased multiple choice question?

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A periodic inventory system requires updating the inventory account only at the end of a period to reflect the quantity and cost of both the goods available and the goods sold. Thus, during the period, the Merchandise Inventory balance remains unchanged. It reflects the beginning inventory balance until it is updated at the end of the period. During the period the cost of merchandise is recorded in a temporary Purchases account. When a company sells merchandise, it records revenue but not the cost of the goods sold. At the end of the period when a company prepares financial statements, it takes a physical count of inventory by counting the quantities and costs of merchandise available. The cost of goods sold is then computed by subtracting the ending inventory amount from the cost of merchandise available for sale.

Purchases   The periodic system uses a temporary Purchases account that accumulates the cost of all purchase transactions during each period. Z-Mart’s November 2 entry to record the purchase of merchandise for $1,200 on credit with terms of 2/10, n/30 is

Purchase Discounts   The periodic system uses a temporary Purchase Discounts account that accumulates discounts taken on purchase transactions during the period. If payment in (a) is delayed until after the discount period expires, the entry is to debit Accounts Payable and credit Cash for $1,200 each. However, if Z-Mart pays the supplier for the previous purchase in (a) within the discount period, the required payment is $1,176 ($1,200 × 98%) and is recorded as

Purchase Returns and Allowances   Z-Mart returned merchandise purchased on November 2 because of defects. In the periodic system, the temporary Purchase Returns and Allowances account accumulates the cost of all returns and allowances during a period. The recorded cost (including discounts) of the defective merchandise is $300, and Z-Mart records the November 15 return with this entry:

Transportation-In   Z-Mart paid a $75 freight charge to transport merchandise to its store. In the periodic system, this cost is charged to a temporary Transportation-In account.

Sales   Under the periodic system, the cost of goods sold is not recorded at the time of each sale. (We later show how to compute total cost of goods sold at the end of a period.) Z-Mart’s November 3 entry to record sales of $2,400 in merchandise on credit (when its cost is $1,600) is:

Sales Returns   A customer returned part of the merchandise from the transaction in (e), where the returned items sell for $800 and cost $600. (Recall: The periodic system records only the revenue effect, not the cost effect, for sales transactions.) Z-Mart restores the merchandise to inventory and records the November 6 return as

Sales Discounts   To illustrate sales discounts, assume that the remaining $1,600 of receivables (computed as $2,400 from e less $800 for f) has credit terms of 3/10, n/90 and that customers all pay within the discount period. Z-Mart records this payment as

Adjusting and Closing Entries   The periodic and perpetual inventory systems have slight differences in adjusting and closing entries. The period-end Merchandise Inventory balance (unadjusted) is $19,000 under the periodic system and $21,250 under the perpetual system. Since the periodic system does not update the Merchandise Inventory balance during the period, the $19,000 amount is the beginning inventory. However, the $21,250 balance under the perpetual system is the recorded ending inventory before adjusting for any inventory shrinkage.

   A physical count of inventory taken at the end of the period reveals $21,000 of merchandise available. The adjusting and closing entries for the two systems are shown in Exhibit 5A.1. The periodic system records the ending inventory of $21,000 in the Merchandise Inventory account (which includes shrinkage) in the first closing entry and removes the $19,000 beginning inventory balance from the account in the second closing entry.2

EXHIBIT 5A.1

Comparison of Adjusting and Closing Entries—Periodic and Perpetual

   By updating Merchandise Inventory and closing Purchases, Purchase Discounts, Purchase Returns and Allowances, and Transportation-In, the periodic system transfers the cost of goods sold amount to Income Summary. Review the periodic side of Exhibit 5A.1 and notice that the boldface items affect Income Summary as follows.

This $230,400 effect on Income Summary is the cost of goods sold amount. The periodic system transfers cost of goods sold to the Income Summary account but without using a Cost of Goods Sold account. Also, the periodic system does not separately measure shrinkage. Instead, it computes cost of goods available for sale, subtracts the cost of ending inventory, and defines the difference as cost of goods sold, which includes shrinkage.

Preparing Financial Statements   The financial statements of a merchandiser using the periodic system are similar to those for a service company described in prior chapters. The income statement mainly differs by the inclusion of cost of goods sold and gross profit—of course, net sales is affected by discounts, returns, and allowances. The cost of goods sold section under the periodic system follows

The balance sheet mainly differs by the inclusion of merchandise inventory in current assets—see Exhibit 5.15. The statement of owner’s equity is unchanged. A work sheet can be used to help prepare these statements. The only differences under the periodic system from the work sheet illustrated in Appendix 5B using the perpetual system are highlighted as follows in blue boldface font.

2 This approach is called the closing entry method. An alternative approach, referred to as the adjusting entry method, would not make any entries to Merchandise Inventory in the closing entries of Exhibit 5A.1, but instead would make two adjusting entries. Using Z-Mart data, the two adjusting entries would be: (1) Dr. Income Summary and Cr. Merchandise Inventory for $19,000 each, and (2) Dr. Merchandise Inventory and Cr. Income Summary for $21,000 each. The first entry removes the beginning balance of Merchandise Inventory, and the second entry records the actual ending balance.

Which inventory system requires that the inventory account be updated when merchandise is purchased?

Which inventory system records a change in the inventory account?

Which inventory system updates the inventory account automatically at the time of each purchase or sales inventory issue?

What account is increased when you buy merchandise inventory?