Small Business UK | Guides & Tips

As you learned earlier in this chapter, the second factor in measuring net income SUBJECTIVITY in a merchandising company is the cost of goods sold. The cost of goods sold may be determined each time a sale occurs or at the end of an accounting period. State the steps in to make the determination when the sale occurs, a company uses a perpetual determining cost of inventory system. Under this system, detailed records of the cost of each inventor sold. Tory item are maintained and continuously show the inventory that should be on hand. For example, a Ford dealership will have separate inventory records for each Escort, Tempo, Taurus, and Thunderbird. When a car is sold, its cost is obtained from the inventory records. Perpetual inventory systems have traditionally been used by companies that sell high unit-value items such as automobiles, furniture, television sets, and large home appliances.
When cost of goods sold is determined only at the end of an accounting period, a company is said to be using a periodic inventory system. This system is widely used by companies that sell thousands of low unit-value items, such as Walt-Mart, True Value hardware stores, and Recall drugstores. Most businesses employ the periodic inventory system because they can control merchandise and manage day-to-day operations without detailed inventory records. In addition, perpetual systems are expensive, and often the benefits they offer do not justify their cost.

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