Final answer:
The Luann Company uses the periodic inventory system to track and manage its inventory by taking physical counts at specific intervals. It is less time-consuming than the perpetual inventory system but can lead to inaccuracies in financial reporting. The cost of goods sold is calculated by subtracting the cost of ending inventory from the total cost of goods available for sale.
Step-by-step explanation:
The Luann Company uses the periodic inventory system to track and manage its inventory. In this system, inventory is counted and valued at specific intervals, such as monthly or quarterly. The company takes a physical count of its inventory at the end of each period and records the quantity and cost of goods on hand.
One advantage of the periodic inventory system is that it is less time-consuming and expensive compared to the perpetual inventory system, where inventory is continuously monitored and updated. However, it also has some limitations. For example, there may be a time delay between the physical count and the recording of inventory, which can lead to inaccuracies in financial reporting.
To illustrate how the periodic inventory system works, let's consider an example. At the beginning of the month, the Luann Company has 100 units of a product in inventory, which were purchased at a cost of $10 per unit. During the month, the company sells 50 units of the product for a total of $1,000. At the end of the month, the company takes a physical count of its inventory and determines that there are 50 units remaining. To calculate the cost of goods sold, the company subtracts the cost of the ending inventory (50 units x $10 per unit = $500) from the total cost of goods available for sale (100 units x $10 per unit = $1,000) to get a cost of goods sold of $500.