Multiple Choice
In the context of calculating Cost of Goods Sold (COGS) under both perpetual and periodic inventory systems, to whom are inventory costs most often allocated?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
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Under the perpetual inventory system, how is the Cost of Goods Sold (COGS) determined when a sale occurs?
A
COGS is calculated only at the end of the accounting period using a physical count.
B
COGS is estimated using the average cost of inventory at the end of the period.
C
COGS is not recorded until payment is received from the customer.
D
COGS is updated continuously with each sale based on the actual cost of inventory sold.
Verified step by step guidance1
Understand the perpetual inventory system: In this system, inventory records are updated continuously to reflect purchases and sales. This ensures real-time tracking of inventory levels and costs.
Recognize the role of Cost of Goods Sold (COGS): COGS represents the direct costs attributable to the goods sold during a specific period. It includes costs such as purchase price, freight-in, and any other costs directly tied to acquiring the inventory.
Identify how COGS is calculated under the perpetual inventory system: When a sale occurs, the system immediately updates the COGS based on the actual cost of the inventory sold. This is different from periodic systems, where COGS is calculated at the end of the accounting period.
Understand the mechanics of updating COGS: Each time a sale is recorded, the system reduces the inventory account by the cost of the sold items and simultaneously records the COGS in the income statement. This ensures accurate financial reporting throughout the period.
Clarify the incorrect options: COGS is not calculated only at the end of the period (this applies to periodic systems), nor is it estimated using average costs or delayed until payment is received. The perpetual system ensures immediate and precise updates to COGS with each transaction.
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