Multiple Choice
Which of the following best determines the difference between a product cost and a period cost in financial accounting?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
Multiple Choice
Which of the following is considered a cost of selling merchandise on account under both perpetual and periodic inventory systems?
A
Purchase discounts
B
Freight-in
C
Inventory shrinkage
D
Bad debt expense
Verified step by step guidance1
Understand the context of the problem: The question is asking about costs associated with selling merchandise on account under both perpetual and periodic inventory systems. Selling merchandise on account means the seller allows the buyer to pay at a later date, creating accounts receivable.
Review the options provided: Purchase discounts, freight-in, inventory shrinkage, and bad debt expense. Each term represents a different type of cost or adjustment in accounting. We need to determine which one is relevant to selling merchandise on account.
Clarify the concept of bad debt expense: Bad debt expense arises when a company sells goods on account and later determines that some customers will not pay their outstanding balances. This is a cost directly related to selling on account, as it reflects the risk of uncollectible accounts receivable.
Analyze the other options: Purchase discounts are reductions in the cost of inventory due to early payment, freight-in refers to transportation costs for acquiring inventory, and inventory shrinkage represents losses due to theft or damage. None of these are directly tied to selling merchandise on account.
Conclude that bad debt expense is the correct answer because it is the cost associated with the risk of uncollectible accounts receivable, which applies under both perpetual and periodic inventory systems.
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