Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

4. Merchandising Operations

Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory

Financial Accounting

4. Merchandising Operations

Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory

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Multiple Choice

Under both the perpetual and periodic inventory systems, when does the cost of inventory become an expense (Cost of Goods Sold) on the income statement?

When the inventory is sold

When the inventory is purchased

At the end of the accounting period, regardless of sales

When payment for the inventory is made to the supplier

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Verified step by step guidance

Understand the concept of Cost of Goods Sold (COGS): COGS represents the direct costs attributable to the production of goods sold by a company. It includes the cost of materials and labor directly used to create the product.

Recognize the difference between perpetual and periodic inventory systems: In a perpetual inventory system, inventory records are updated continuously as transactions occur. In a periodic inventory system, inventory records are updated at the end of an accounting period.

Identify when inventory becomes an expense: Inventory is initially recorded as an asset on the balance sheet. It becomes an expense (COGS) on the income statement when the inventory is sold, as this reflects the matching principle in accounting, which matches expenses to revenues.

Clarify the incorrect options: Inventory does not become an expense when it is purchased, as it is still considered an asset. It also does not become an expense at the end of the accounting period unless it has been sold. Payment to the supplier does not affect the timing of when inventory becomes an expense.

Conclude that under both inventory systems, the cost of inventory becomes an expense (COGS) on the income statement when the inventory is sold, as this aligns with the revenue recognition principle.