Multiple Choice
Under a periodic inventory system, which formula is used to compute the cost of direct materials used for the current year?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
Multiple Choice
On a traditional income statement, Cost of Goods Sold (COGS) reports the:
A
total cost of inventory purchased during the period
B
total cost of inventory sold to customers during the period
C
total sales revenue earned during the period
D
ending inventory balance at the end of the period
Verified step by step guidance1
Understand the concept of Cost of Goods Sold (COGS): COGS represents the direct costs attributable to the production of goods sold by a company during a specific period. It includes costs such as materials and labor directly involved in creating the product.
Clarify the distinction between inventory purchased and inventory sold: Inventory purchased refers to the total cost of goods acquired during the period, while inventory sold refers to the portion of inventory that has been sold to customers, which is what COGS measures.
Recognize the relationship between COGS and sales revenue: COGS is subtracted from sales revenue on the income statement to calculate gross profit, but it does not represent total sales revenue itself.
Understand the role of ending inventory: Ending inventory is the value of unsold goods at the end of the period and is not included in COGS. Ending inventory is reported on the balance sheet, not the income statement.
Conclude that COGS on a traditional income statement specifically reports the total cost of inventory sold to customers during the period, as this aligns with its definition and purpose in financial accounting.
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