Q. Starting inventory and net cost of purchases?

Hanlon's start inventory (USD 24000) plus net cost of purchases (USD 166000) is equivalent to cost of goods available for sale (USD 190000). The firm subtract the ending inventory cost (USD 31000) from cost of goods available for sale to arrive at cost of goods sold (USD 159000).

Another method of looking at this relationship is the following diagram

Starting inventory and net cost of purchases combine to form cost of goods available for sale. Hanlon divides the cost of goods obtainable for sale into ending inventory which is the cost of goods not sold and cost of goods sold.

To continue the computation appearing in Exhibit 38 net cost of purchases (USD 166000) is equal to purchases (USD 167000) less purchase discounts (USD 3000) and purchase returns and allowances (USD 8000) plus transportation-in (USD 10000).

Companies use periodic inventory procedure for the reason that of its simplicity and relatively low cost. But periodic inventory procedure provides little control over inventory. Firms suppose any items not included in the physical count of inventory at the end of the period have been sold. Therefore they mistakenly assume items that have been stolen have been sold and include their cost in cost of goods sold.

To exemplify suppose that the cost of goods available for sale was USD 200000 as well as ending inventory was USD 60000. These figures propose that the cost of goods sold was USD 140000. Now assume that USD 2000 of goods were actually shoplifted during the year.

If such goods hadn't been stolen the ending inventory would have been USD 62000 and the cost of goods sold only USD 138000. Therefore the USD 140000 cost of goods sold computed under periodic inventory procedure includes both the cost of the merchandise delivered to customers and the cost of merchandise stolen.