Final answer:
The Purchases account plays a critical role in periodic inventory systems by helping estimate inventory values between physical counts, affecting financial reporting and decision-making.
Step-by-step explanation:
The Purchases account is very important when it comes to estimating inventory values in between physical counts when using a periodic inventory system. In a periodic inventory system, the Purchases account is used to record all purchases of inventory during the period. Since the actual inventory is not updated with each sale or purchase, businesses rely on the Purchases account to estimate the cost of goods sold (COGS) and the ending inventory balance at the end of a period by using the following formula:
Ending Inventory = Beginning Inventory + Purchases - COGS
This is crucial for financial reporting and management decisions. Regular updates to this account help in providing an accurate estimate of inventory levels, which impacts the balance sheet, income statement, and the calculation of key financial ratios.