Multiple Choice
Which of the following inventory systems assigns cost to Cost of Goods Sold (COGS) at the time of each sale, rather than at the end of the accounting period?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
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Which of the following is a common mistake made by companies when assigning costs to segments under both perpetual and periodic inventory systems?
A
Allocating common fixed costs to segments, making them appear less profitable than they are
B
Failing to record inventory shrinkage in a periodic inventory system
C
Recording inventory purchases directly to Cost of Goods Sold in a perpetual system
D
Recognizing sales revenue before goods are shipped to customers
Verified step by step guidance1
Understand the context of the question: The problem is asking about common mistakes companies make when assigning costs to segments under both perpetual and periodic inventory systems. Each option provided represents a potential error, and we need to evaluate them based on accounting principles.
Review the concept of segment reporting: Segments are parts of a company (e.g., divisions, product lines) for which financial information is reported separately. A common mistake is allocating common fixed costs (costs shared across segments) to individual segments, which can distort profitability analysis.
Analyze the periodic inventory system: In a periodic system, inventory shrinkage (loss of inventory due to theft, damage, etc.) is not recorded until a physical count is performed. Failing to account for shrinkage can lead to inaccurate financial statements.
Analyze the perpetual inventory system: In a perpetual system, inventory purchases are recorded directly into the inventory account, not Cost of Goods Sold (COGS). Recording purchases directly to COGS would bypass the inventory account and lead to errors in inventory tracking.
Evaluate revenue recognition principles: Sales revenue should only be recognized when goods are shipped to customers (or when control of goods is transferred). Recognizing revenue before shipment violates the revenue recognition principle and can lead to overstated revenue.
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