Effect of inventory losses: Perpetual system
Reeves Designs experienced the following events during 2012, its first year of operation:
1. Started the business when it acquired $40,000 cash from the issue of common stock.
2. Paid $28,000 cash to purchase inventory.
3. Sold inventory costing $21,500 for $34,200 cash.
4. Physically counted inventory; had inventory of $5,800 on hand at the end of the accounting period.
Required
a. Open appropriate ledger T-accounts, and record the events in the accounts.
b. Prepare an income statement and balance sheet.
c. If all purchases and sales of merchandise are reflected as increases or decreases to the Merchandise Inventory account, why is it necessary for management to even bother to take a physical count of goods on hand (ending inventory) at the end of the year?
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