Sunland company uses a periodic inventory system – Sunland Company’s adoption of a periodic inventory system serves as the cornerstone of this in-depth analysis, unveiling the intricacies of a method that shapes the company’s inventory management practices. Delving into the nuances of this system, we embark on a journey to unravel its advantages, limitations, and the profound impact it exerts on Sunland Company’s financial reporting.

The periodic inventory system employed by Sunland Company stands as a meticulous process, meticulously designed to ensure the accuracy and reliability of inventory records. This system entails a comprehensive inventory counting process, coupled with robust methods for inventory valuation, providing a solid foundation for the company’s financial reporting.

Periodic Inventory System

A periodic inventory system is a method of accounting for inventory in which the physical count of inventory is performed at the end of the accounting period. This system is typically used by businesses that have a low volume of inventory transactions or that do not have the resources to implement a perpetual inventory system.

Examples of businesses that typically use a periodic inventory system include:

• Small businesses
• Retail stores
• Wholesale distributors

The advantages of using a periodic inventory system include:

• Simplicity: The periodic inventory system is relatively simple to implement and maintain.
• Cost-effective: The periodic inventory system is less expensive to implement and maintain than a perpetual inventory system.

The disadvantages of using a periodic inventory system include:

• Inaccuracy: The periodic inventory system is less accurate than a perpetual inventory system because the physical count of inventory is only performed at the end of the accounting period.
• Time-consuming: The periodic inventory system can be time-consuming to implement, especially for businesses with a large volume of inventory transactions.

Sunland Company’s Inventory System

Sunland Company uses a periodic inventory system. The company’s inventory counting process is as follows:

1. At the end of the accounting period, all inventory is physically counted.
2. The physical count of inventory is compared to the inventory records.
3. Any discrepancies between the physical count of inventory and the inventory records are investigated and corrected.

Sunland Company uses the following methods to value its inventory:

• Cost: The cost of inventory is the purchase price of the inventory plus any additional costs incurred to get the inventory ready for sale.
• Lower of cost or market: The lower of cost or market is the lower of the cost of inventory or the current market price of the inventory.

Impact on Financial Reporting

The use of a periodic inventory system affects Sunland Company’s financial statements in the following ways:

• The cost of goods sold is calculated based on the physical count of inventory at the end of the accounting period.
• The inventory asset is reported on the balance sheet at the lower of cost or market.

Sunland Company makes the following accounting entries to record inventory transactions:

• To record the purchase of inventory:

  Debit: Inventory

  Credit: Accounts Payable

• To record the sale of inventory:

  Debit: Accounts Receivable

  Credit: Sales Revenue

  Debit: Cost of Goods Sold

  Credit: Inventory

Inventory errors can have a significant impact on Sunland Company’s financial reporting. For example, an overstatement of inventory can lead to an overstatement of assets and an understatement of expenses. This can result in an overstatement of net income and an understatement of income taxes.

Internal Controls: Sunland Company Uses A Periodic Inventory System

Sunland Company has implemented the following key internal controls to ensure the accuracy of its inventory records:

• Segregation of duties: The duties of purchasing, receiving, and shipping inventory are segregated.
• Regular inventory counts and reconciliations: Sunland Company performs regular inventory counts and reconciliations to ensure that the physical count of inventory matches the inventory records.

The segregation of duties helps to prevent inventory fraud by ensuring that no one person has control over the entire inventory process. Regular inventory counts and reconciliations help to identify and correct any errors in the inventory records.

Inventory Management

Sunland Company uses the following inventory management techniques:

• Just-in-time (JIT) inventory: JIT inventory is a method of inventory management that seeks to minimize the amount of inventory on hand. JIT inventory is based on the principle that inventory should be purchased and received only when it is needed.

• Economic order quantity (EOQ): EOQ is a method of inventory management that determines the optimal quantity of inventory to order. EOQ is based on the following factors:
  • Annual demand for the inventory item
  • Cost of ordering the inventory item
  • Cost of holding the inventory item

Sunland Company uses inventory turnover ratios to evaluate its inventory management practices. Inventory turnover ratios measure the number of times that inventory is sold and replaced during a given period of time. Sunland Company uses the following inventory turnover ratios:

• Inventory turnover ratio: The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory.
• Days’ sales in inventory: Days’ sales in inventory is calculated by dividing the average inventory by the cost of goods sold per day.

Sunland Company uses these inventory turnover ratios to identify areas where its inventory management practices can be improved.

Helpful Answers

What are the key advantages of using a periodic inventory system?

Periodic inventory systems offer several advantages, including reduced labor costs, simplified record-keeping, and the ability to take physical inventory counts at convenient times.

How does Sunland Company value its inventory?

Sunland Company utilizes a combination of methods to value its inventory, including the first-in, first-out (FIFO) method, the last-in, first-out (LIFO) method, and the weighted average cost method.

What are the potential risks associated with using a periodic inventory system?

Periodic inventory systems are not without risks, including the potential for inventory shrinkage, obsolescence, and errors in inventory counts.