The Periodic Inventory System

The Periodic Inventory System is the "old way" of accounting for inventory, though it is still used by some companies today. Under the Periodic Inventory System, the Inventory account is not updated every time that inventory is purchased or sold. Rather, it is brought up to date at the end of the year.

Beacuse the Inventory account is not up to date, the Cost of Goods Sold must be estimated at the end of the year. Certain clues can be assembled so that an income statement can be constructed. Take a look at Example 1.

Example 1

Johnson Company started 2008 with beginning inventory of $20,000. The company made purchases of $30,000 in February, $60,000 in June, $40,000 in September, and $45,000 in November. On the evening of December 31, 2008, the employees counted the ending inventory, which was $30,000.

Cash registers were used in 2008 to keep track of all sales. For the entire year, the sales amounted to $400,000. Other expenses in 2008 amounted to $50,000.

Required: Can you create an income statement for 2008? Here's a format you can use:

 
Johnson Company
 
 
Income Statement
 
 
For Year Ended 12/31/08
 
     
Sales   $
Cost of Goods Sold:    
...Beginning Inventory $  
...+ Purchases $  
...=Cost of Goods Available for Sale $  
...Minus Ending Inventory $  
=Cost of Goods Sold   $
..Gross Profit   $
...Minus Expenses   $
Net Income   $

Example 2

Johnson Company started 2009 with beginning inventory of $30,000. Note that the beginning inventory for 2009 is the ending inventory from 2008.

The company made purchases of $40,000 in February, $90,000 in June, $80,000 in September, and $60,000 in November. On the evening of December 31, 2008, the employees counted the ending inventory, which was $60,000.

Cash registers were used in 2009 to keep track of all sales. For the entire year, the sales amounted to $500,000. Other expenses in 2008 amounted to $50,000.

Required: Can you create an income statement for 2009? Use the format shown above.