Burt’s Bees describes itself as an “ Earth Friendly, Natural Personal Care Company” that produces products for health, beauty, and personal hygiene. The company manufactures over 150 products distributed in nearly 30,000 retail outlets worldwide. As a merchandising company, Burt’s Bees follows its inventory closely. This requires monitoring the receipt, production, purchasing, and planning of inventory. At the end of each time period, Burt’s Bees must make adjusting entries to prepare its financial statements accurately. Many of the adjustments are entries you have already learned, such as depreciation, expiration of prepaid expenses, adjustment of supplies used, and recording of accrued expenses. However, merchandising companies also require adjusting entries related to merchandise inventory. Companies such as Burt’s Bees monitor inventory, prepare a worksheet, and record adjusting entries using either the perpetual or periodic inventory system. Using your book and/ or conducting a brief Internet search to find the differences between perpetual and periodic inventory systems, answer the following questions:
1. What type of inventory system do you think Burt’s Bees uses? Why?
2. Using the inventory system you selected in no. 1, what is an example of the type of journal entry Burt’s Bees would make when purchasing merchandise on account?
3. Using the inventory system you selected in no. 1, what journal entry would Burt’s Bees use to record the sale of merchandise on account?