A multi-step income statement in a periodic inventory system differs from that in a perpetual inventory system because it has:
a) a detailed cost of goods sold section
b) net sales
c) gross profit
d) operating expenses
The Correct Answer and Explanation is :
The correct answer is a) a detailed cost of goods sold section.
Explanation:
In a periodic inventory system, the cost of goods sold (COGS) is calculated at the end of the accounting period. The periodic system requires businesses to determine the ending inventory and then subtract it from the sum of the beginning inventory and purchases during the period. The resulting COGS is recorded as a single, consolidated entry in the income statement. The periodic system does not continuously update inventory or COGS with each sale, which is why a detailed section is necessary at the end of the period.
The multi-step income statement in both the periodic and perpetual inventory systems generally starts by calculating net sales, which is the total sales minus any returns, allowances, and discounts. The difference between sales and the cost of goods sold gives gross profit. Gross profit is the income left over after subtracting the direct costs of producing the goods sold, such as materials and labor.
However, the critical difference between the two systems comes after gross profit. In the perpetual inventory system, COGS is updated continuously with each sale, and inventory is adjusted in real-time. Therefore, businesses don’t need a detailed section to calculate the cost of goods sold at the end of the period; it is already tracked throughout the period. This continuous tracking allows for real-time insights into inventory levels, cost of sales, and profitability.
In contrast, the periodic system only updates COGS at the end of the period when the physical inventory count is taken. The business must calculate COGS at the end of the period and ensure that the proper inventory level is adjusted before calculating the final financial results. Therefore, the income statement in a periodic system includes a detailed cost of goods sold section where these adjustments and calculations are made, which is absent in a perpetual system.