Music Plus Financial Statement
As the financial officer of Music Plus, I’m writing this memorandum to give an in-depth analysis of the annual financial statement. I received your email regarding your complaints that I overvalued the net income since you thought that there are possible inventory shrinkages and shoplifting in the retail shop. I found it wise to give an explanatory of how I came up with a final financial statement.
First, the retail shop uses a perpetual inventory system. A perpetual inventory system automatically updates its record whenever goods are received or sold. Thus, the system keeps track of inventory continuously. Any purchase or return done is immediately recorded in the inventory account. The cost of goods sold account is updated continually from the sale of each product. Continuous updates from the perpetual inventory system are due to the system uses digital technology to track inventory in real-time through updates sent electronically to a central database. Therefore, data used in the preparing financial system is from a continuously updated perpetual inventory system.
Unfortunately, I overstated income in the financial system since I prepared the financial statement from the perpetual inventory data. Overstatement of income arises when there are fewer sales recorded while the inventory at the shop is reducing but not recorded by the perpetual system. This can be through shoplifting from customers and employee theft despite having installed enough security systems. Probably involving a periodic inventory system would help reduce overstating income in the next financial system. A periodic system comprises an occasional physical count of goods in the retail shop to measure the available products and cost of goods sold. Regular measurement of available inventory can is done monthly, quarterly, or once a year. However, the periodic system can be time-consuming and challenging to incorporate.