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 the perpetual inventory system, how is the Cost of Goods Sold (COGS) determined when inventory is sold?

COGS is updated continuously with each sale based on the actual cost of inventory sold.

COGS is not recorded until payment is received from customers.

COGS is calculated only at the end of the accounting period using a physical count.

COGS is estimated using the average cost of inventory at the end of the period.

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Verified step by step guidance

Understand the perpetual inventory system: This system continuously updates inventory records and Cost of Goods Sold (COGS) in real-time as transactions occur, rather than waiting until the end of the accounting period.

Recognize the key feature of perpetual inventory systems: When inventory is sold, the actual cost of the inventory sold is immediately recorded as COGS. This ensures that the financial statements reflect the most accurate and up-to-date information.

Clarify the incorrect options: COGS is not recorded based on customer payment (as payment timing is unrelated to inventory cost recognition), nor is it calculated only at the end of the accounting period using a physical count (this is characteristic of the periodic inventory system).

Explain why estimation methods like average cost are not used in this context: Under the perpetual system, the actual cost of each inventory item sold is tracked and recorded, rather than relying on estimates or averages.

Summarize the correct approach: In the perpetual inventory system, COGS is updated continuously with each sale based on the actual cost of the inventory sold, ensuring real-time accuracy in financial reporting.