Under the perpetual inventory system, how is the Cost of Goods Sold (COGS) determined when inventory is sold?

• A. COGS is calculated only at the end of the accounting period based on a physical count of inventory.
• B. COGS is updated continuously with each sale, reflecting the actual cost of inventory sold at the time of each transaction.
• C. COGS is estimated using the average cost of inventory at the end of the year.
• D. COGS is not recorded until payment is received from customers.

Answer: (B)

Verified step by step guidance

1. Understand the perpetual inventory system: This system continuously updates inventory records and Cost of Goods Sold (COGS) in real-time as transactions occur, rather than waiting until the end of the accounting period.
2. Recognize the key feature of perpetual inventory systems: When inventory is sold, the system immediately records the cost associated with the sold inventory, ensuring that COGS reflects the actual cost of the items sold at the time of the transaction.
3. Compare this to other methods: Unlike periodic inventory systems, which calculate COGS at the end of the accounting period based on a physical count, the perpetual system provides ongoing updates to inventory and COGS.
4. Identify the correct approach for COGS calculation: In the perpetual inventory system, COGS is updated continuously with each sale, ensuring accurate and timely financial reporting.
5. Apply this understanding to the problem: The correct answer is that COGS is updated continuously with each sale, reflecting the actual cost of inventory sold at the time of each transaction.