Final answer:
A periodic inventory system measures cost of goods sold by counting inventory at the end of the period. It involves a physical count to determine the ending inventory, which is key to calculating COGS. Inventories play a significant role in GDP and economic analysis.
Step-by-step explanation:
A periodic inventory system measures the cost of goods sold by counting inventory at the end of the period. In this system, a physical count of the inventory is conducted at specified intervals (typically at the end of a fiscal year) to determine the ending inventory balance. This balance is then used to calculate the cost of goods sold (COGS) by using the formula: Starting Inventory + Purchases - Ending Inventory = COGS. The periodic system contrasts with a perpetual inventory system, where updates to inventory accounts occur continuously as transactions happen.
Inventories are an important part of a business's assets and can directly affect the calculation of Gross Domestic Product (GDP). These unsold goods add to a nation's inventory balance and can indicate economic trends such as a rise in inventory levels signaling a slowdown in sales or lower consumption. Understanding these elements is fundamental for businesses and economists when analyzing the economy's health and predicting future trends.
The national income approach to measuring GDP also considers inventories, as it focuses on summing all incomes produced in a year, which is equated to the nation's total output, including the goods produced but not yet sold.