With a periodic inventory system, companies count their inventory occasionally and update it at the end of the period in question. The periodic inventory system is usually found in small businesses that have low sales volumes such as a car dealership, whereas large businesses, such as supermarket retailers, use perpetual inventory systems. Periodic vs Perpetual Inventory SystemsĬompanies can use periodic or perpetual systems to keep track of their inventory. We start with the opening balance, add purchases and subtract the inventory sold to customers (COGS). The example above shows us how we obtain the inventory balance. The relationship between these items can be summarized in an inventory BASE analysis as follows: The inventory which has been sold to customers is removed from the balance sheet and transferred to COGS in the income statement. Inventory and COGS are linked in the income statement as the line item COGS represents inventory sold. The Hershey Company – Extract from footnote 1 Inventory and COGS The formula is cost of goods sold divided by revenue.Ĭost of Goods Sold in the Financial StatementsĪccounting policy that stipulates the expenses used to calculate the line item.
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