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Multiple Choice
11. Under the perpetual inventory system, how is the cost of goods sold (COGS) determined when inventory is sold?
A
COGS is calculated only at the end of the accounting period using a physical count.
B
COGS is recorded immediately at the time of each sale based on the actual cost of inventory sold.
C
COGS is estimated using the average cost of inventory at the end of the period.
D
COGS is not recorded until payment is received from the customer.
Verified step by step guidance
1
Step 1: Understand the perpetual inventory system. In this system, inventory records are updated continuously to reflect purchases and sales. This allows for real-time tracking of inventory levels and costs.
Step 2: Recognize how the cost of goods sold (COGS) is handled under this system. Unlike the periodic inventory system, where COGS is calculated at the end of the accounting period, the perpetual system records COGS immediately at the time of each sale.
Step 3: Note that the perpetual inventory system uses the actual cost of the inventory sold to determine COGS. This means that the system relies on detailed records of inventory costs, such as FIFO (First-In, First-Out), LIFO (Last-In, First-Out), or specific identification methods.
Step 4: Eliminate incorrect options. For example, COGS is not calculated only at the end of the accounting period, nor is it estimated using average costs or delayed until payment is received. These methods are inconsistent with the perpetual inventory system.
Step 5: Conclude that under the perpetual inventory system, COGS is recorded immediately at the time of each sale based on the actual cost of inventory sold. This ensures accurate and timely financial reporting.