Question

The following data were extracted from the accounting records of Harkins Company for the year ended April 30, 2014:Merchandise inventory, May 1, 2013$380,000Merchandise inventory, April 30, 2014415,000Purchases3,800,000Purchases returns and allowances150,000Purchases discounts80,000Sales5,850,000Freight in16,600a. Prepare the cost of merchandise sold section of the income statement for the year ended April 30, 2014, using the periodic inventory system.b. Determine the gross profit to be reported on the income statement for the year ended April 30, 2014.c. Would gross profit be different if the perpetual inventory system was used instead of the periodic inventory system?

Answer 1

Answer:

a. Cost of merchandise sold = $3,551,600  

b. Gross profit = $2,298,400

c. No, it would not have been different.

Explanation:

a. Prepare the cost of merchandise sold section of the income statement for the year ended April 30, 2014, using the periodic inventory system.

This can be presented as follows:

HARKINS COMPANY

Income Statement (Merchandise Sold Section only)

For the year ended April 30, 2014

Particulars                                                            $                      $          

Merchandise inventory, May 1, 2013                                    380,000

Purchases                                                   3,800,000

Purchases returns and allowances            (150,000)

Purchases discounts                                    (80,000)  

Net Purchases                                            3,570,000

Freight in                                                         16,600  

Cost of merchandise purchased                                        3,586,600                              

Merchandise available for sale                                          3,966,600

Merchandise inventory, April 30, 2014                                (415,000)  

Cost of merchandise sold                                                  3,551,600  

b. Determine the gross profit to be reported on the income statement for the year ended April 30, 2014.

Gross profit = Sales -  Cost of merchandise sold = $5,850,000 - $3,551,600 = $2,298,400

c. Would gross profit be different if the perpetual inventory system was used instead of the periodic inventory system?

The perpetual inventory system is an inventory management method that maintains a continual record of inventory transactions and therefore makes automatic updates with the use of technology whenever a product is sold or received.

On the other hand, periodic inventory system is an inventory management method in which the amount of inventory is determined at the end of each accounting period or in specified periods through a physical count.

From the above, it can be seen that the major difference between the two is that the perpetual inventory system maintains a continual record of inventory transactions, while the periodic system records only inventory transactions only at the end of the period. However, both will produce the same inventory balance at the end of the period.

Since both the perpetual inventory system and the periodic inventory system will produce the same inventory balance at the end of the period, there would not have been difference in the gross profit if either of the two is used.