Multiple Choice
Under the perpetual and periodic inventory systems, what effect will a decrease in inventory have on free cash flows, assuming all other factors remain constant?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
Multiple Choice
Which of the following statements best describes how Cost of Goods Sold (COGS) is determined under the perpetual inventory system compared to the periodic inventory system?
A
Under the perpetual system, COGS is updated continuously with each sale, while under the periodic system, COGS is calculated at the end of the period.
B
The perpetual system requires a physical inventory count to determine COGS, while the periodic system does not.
C
Under both systems, COGS is only calculated at the end of the accounting period.
D
COGS is unaffected by the choice between perpetual and periodic inventory systems.
Verified step by step guidance1
Understand the key difference between the perpetual and periodic inventory systems. The perpetual system updates inventory and Cost of Goods Sold (COGS) in real-time with each transaction, while the periodic system updates these accounts only at the end of the accounting period.
In the perpetual inventory system, every sale or purchase of inventory is recorded immediately. This means that COGS is updated continuously as sales occur.
In the periodic inventory system, COGS is not updated with each sale. Instead, it is calculated at the end of the accounting period using the formula: COGS = Beginning Inventory + Purchases - Ending Inventory.
A physical inventory count is required under both systems to ensure accuracy. However, in the perpetual system, the count is used to verify and adjust records, while in the periodic system, it is essential for calculating COGS.
The correct statement is: 'Under the perpetual system, COGS is updated continuously with each sale, while under the periodic system, COGS is calculated at the end of the period.' This reflects the fundamental operational difference between the two systems.
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