Multiple Choice
Which of the following costs is included in finished goods inventory under both perpetual and periodic inventory systems?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
Multiple Choice
If a company uses the perpetual inventory system and records a sale of inventory with variable costs of \$20 per unit, what is the correct journal entry to record the cost of goods sold at the time of sale?
A
No entry is made until the end of the period
B
Debit Cost of Goods Sold \$20; Credit Inventory \$20
C
Debit Inventory \$20; Credit Cost of Goods Sold \$20
D
Debit Purchases \$20; Credit Inventory \$20
Verified step by step guidance1
Understand the perpetual inventory system: In this system, inventory and cost of goods sold (COGS) are updated continuously as transactions occur. This means that every sale of inventory requires an immediate adjustment to both the inventory account and the COGS account.
Identify the accounts involved: When inventory is sold, the cost of the inventory is transferred from the 'Inventory' account to the 'Cost of Goods Sold' account. This reflects the expense incurred to generate revenue.
Determine the journal entry format: To record the cost of goods sold, you need to debit the 'Cost of Goods Sold' account (an expense account) and credit the 'Inventory' account (an asset account). This reduces the inventory balance and increases the expense associated with the sale.
Apply the given variable cost per unit: The problem states that the cost per unit is \$20. For each unit sold, the journal entry will reflect this amount. If multiple units are sold, the total cost would be calculated as \$20 multiplied by the number of units sold.
Write the journal entry: Based on the perpetual inventory system, the correct journal entry is: Debit 'Cost of Goods Sold' for \$20 (or the total cost for multiple units) and Credit 'Inventory' for \$20 (or the total cost for multiple units). This ensures proper accounting for the sale of inventory.
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