Multiple Choice
Under the LIFO inventory method, it is assumed that the cost of the latest units purchased are:
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
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Under the periodic inventory system, the value of goods added to a firm's inventory in a certain year is treated as:
A
Inventory shrinkage
B
Operating income
C
Purchases expense
D
Cost of Goods Sold
Verified step by step guidance1
Understand the periodic inventory system: Under this system, inventory is updated at the end of the accounting period, and purchases made during the year are recorded in a temporary account called 'Purchases Expense.'
Recognize that purchases expense represents the cost of goods acquired during the year, which will later be used to calculate the Cost of Goods Sold (COGS).
Recall the formula for COGS under the periodic inventory system: \( \text{COGS} = \text{Beginning Inventory} + \text{Purchases Expense} - \text{Ending Inventory} \).
Note that inventory shrinkage refers to losses due to theft, damage, or errors, and operating income is a broader measure of profitability, neither of which directly relate to purchases expense.
Conclude that under the periodic inventory system, the value of goods added to inventory during the year is treated as 'Purchases Expense,' which is later used in the calculation of COGS.
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