Multiple Choice
Which of the following best describes a key difference between the perpetual and periodic inventory systems in calculating Cost of Goods Sold (COGS)?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
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The balance of the Cost of Goods Sold account at the end of the year represents:
A
The total purchases made during the year
B
The ending inventory value
C
The gross profit for the year
D
The total cost of inventory sold during the year
Verified step by step guidance1
Understand the concept of Cost of Goods Sold (COGS): COGS represents the direct costs attributable to the production of goods sold by a company during a specific period. It includes the cost of materials and labor directly used to create the goods.
Recognize that COGS does not represent purchases made during the year. Purchases are part of the calculation but do not directly equate to COGS. COGS is calculated using the formula: \( \text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory} \).
Understand that COGS does not represent the ending inventory value. Ending inventory is the value of unsold goods at the end of the period and is subtracted from the sum of beginning inventory and purchases to calculate COGS.
Clarify that COGS does not represent gross profit. Gross profit is calculated as \( \text{Gross Profit} = \text{Net Sales} - \text{COGS} \). COGS is a component used to determine gross profit but is not the same as gross profit.
Conclude that the balance of the Cost of Goods Sold account at the end of the year represents the total cost of inventory sold during the year. This is the correct interpretation of COGS.
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