Multiple Choice
Which of the following best describes how the cost of goods sold (COGS) is determined under the perpetual inventory system compared to the periodic inventory system?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
Multiple Choice
Madison Company uses the FIFO method to account for inventory. Under the perpetual inventory system, which of the following statements best describes how the cost of goods sold (COGS) is determined using FIFO?
A
COGS is calculated by assigning the cost of the earliest purchased inventory to each sale as it occurs.
B
COGS is calculated by assigning the cost of the most recently purchased inventory to each sale as it occurs.
C
COGS is calculated only at the end of the period using the cost of the earliest purchases.
D
COGS is calculated at the end of the period by averaging the cost of all inventory purchases.
Verified step by step guidance1
Understand the FIFO (First-In, First-Out) inventory method: FIFO assumes that the earliest inventory purchased is sold first. This means the cost of goods sold (COGS) is based on the cost of the oldest inventory items.
Recognize the perpetual inventory system: Under this system, inventory records are updated continuously as transactions occur, including purchases and sales.
Determine how COGS is calculated under FIFO in a perpetual system: Each time a sale occurs, the cost of the goods sold is calculated by assigning the cost of the earliest purchased inventory to the sale.
Contrast FIFO with other methods: For example, under LIFO (Last-In, First-Out), the most recently purchased inventory is assigned to COGS. Under the weighted average method, COGS is calculated using the average cost of all inventory items.
Clarify the timing of COGS calculation: In a perpetual system using FIFO, COGS is calculated at the time of each sale, not at the end of the period. This distinguishes it from periodic systems where calculations may occur at the end of the accounting period.
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