Multiple Choice
Which of the following statements is correct regarding a periodic inventory system and purchases?
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4. Merchandising Operations
Periodic Inventory - Purchases
Multiple Choice
Under a periodic inventory system, purchases of merchandise for resale are recorded as which of the following?
A
A credit to Purchases at the time of purchase
B
A debit to Inventory at the time of purchase
C
A debit to Purchases (a temporary account) at the time of purchase
D
A debit to Cost of Goods Sold at the time of purchase
Verified step by step guidance1
Understand that under a periodic inventory system, inventory accounts are not updated continuously with each purchase or sale. Instead, purchases are recorded in a separate temporary account called 'Purchases'.
Recognize that when merchandise is bought for resale, the 'Purchases' account is increased, which means it is debited because it is an asset-related temporary account.
Note that the 'Inventory' account is not debited at the time of purchase under the periodic system; inventory is only updated at the end of the accounting period after a physical count.
Recall that 'Cost of Goods Sold' is not affected at the time of purchase in a periodic system; it is calculated at the end of the period using the formula: \(\text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory}\).
Therefore, the correct recording at the time of purchase under a periodic inventory system is a debit to 'Purchases' and a credit to 'Accounts Payable' or 'Cash', depending on the payment method.
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