Impact on Financials from the Periodic Inventory Method
Periodic Inventory Method
Inventory refers to money that is either your own or which you borrowed to inject into the business. The inventory method chosen can affect the amount of current assets and gross profit income statement. This is especially in the case where pricesare subject to change. The choice of the inventory method should be reflective of a company’s economic circumstances which will a go long way in creating its financial statements. Most business owners use inventory systems to track and update their inventories.
A disciplined inventory will control, keep costs relatively low, increase profits and also enhance the chances of attaining long term success and growth. This will result in more accurate cost of goods which are sold and eventually, you’ll have more reliable financial statements.The periodic inventory method consists of a periodic system which is an actual physical count of the inventory at hand. This count can be done anytime though it preferably should be done yearly or quarterly.
In determining the cost of goods which were sold, you determine the initial cost of goods at hand, add the cost of goods which were purchased and subtract the cost of goods at hand at the end of the accounting period. However, the periodic system doesn’t give a detailed inventory record throughout the period. Thus, when the period ends, it should be able to coincide with the end of a reporting period, or a stipulated time frame from which a report is drawn. Thus, common reporting periods conclude on quarterly or annual basis.