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

Perpetual Inventory - Purchases

Financial Accounting

4. Merchandising Operations

Perpetual Inventory - Purchases

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Multiple Choice

Using the perpetual inventory system, what is the effect of a sale of inventory on assets?

Total assets decrease because inventory is removed from the books.

Total assets increase because both inventory and cash/accounts receivable increase.

Total assets decrease because cash is paid out for the inventory sold.

Total assets remain unchanged because inventory decreases and cash or accounts receivable increases by the same amount.

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Verified step by step guidance

Understand the perpetual inventory system: This system continuously updates inventory records to reflect purchases and sales. When inventory is sold, the system records both the reduction in inventory and the increase in cash or accounts receivable.

Analyze the transaction: A sale of inventory involves two key changes in the accounting records. First, inventory decreases because the goods are no longer owned by the company. Second, cash or accounts receivable increases because the company receives payment or expects payment for the sale.

Consider the impact on assets: Inventory is classified as an asset, and cash or accounts receivable is also classified as an asset. When inventory decreases, it reduces total assets, but this reduction is offset by the increase in cash or accounts receivable, which adds to total assets.

Apply the accounting equation: The accounting equation is Assets = Liabilities + Equity. Since the decrease in inventory is exactly matched by the increase in cash or accounts receivable, the total assets remain unchanged, and the accounting equation is balanced.

Conclude the effect: In the perpetual inventory system, the sale of inventory does not change the total assets because the decrease in inventory is offset by the increase in cash or accounts receivable.