Final answer:
In a periodic inventory system, the cost of ending inventory must be calculated at the end of an accounting period to determine the Cost of Goods Sold (COGS) using a specific formula. It requires physical inventory counts and can affect financial performance and tax calculations.
Step-by-step explanation:
In a periodic inventory system, an entity is required to calculate the cost of Ending Inventory at the end of an accounting period and then use the Cost of Goods Sold (COGS) equation to determine the total cost of goods sold during that period. Unlike the perpetual inventory system where COGS is updated continuously, the periodic system relies on physical inventory counts and calculations at specific intervals, typically at the end of the year. To calculate the COGS, you would use the following formula:
Beginning Inventory + Purchases - Ending Inventory = COGS
It is imperative to accurately value the Ending Inventory, which may necessitate counting physical inventory and applying the appropriate valuation method, such as FIFO (First-In, First-Out), LIFO (Last-In, First-Out), or Weighted Average Cost. An accurate COGS figure is crucial for reporting financial performance on the income statement and can also affect business tax calculations.