Multiple Choice
In step 2 of the gross profit method, the estimated cost of goods sold is calculated by:
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
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In a perpetual inventory system using the FIFO method, the unit product cost is the same as the ______.
A
cost of the last units sold
B
average cost of all units available for sale
C
cost of the earliest units purchased
D
cost of the most recently purchased units
Verified step by step guidance1
Understand the FIFO (First-In, First-Out) method: FIFO assumes that the earliest goods purchased are the first ones to be sold. This means the cost of goods sold (COGS) is based on the cost of the oldest inventory items.
Recognize the perpetual inventory system: In a perpetual inventory system, inventory records are updated continuously as transactions occur, rather than periodically.
Identify the relationship between FIFO and unit product cost: Under FIFO, the unit product cost for items sold is derived from the cost of the earliest units purchased, as these are considered sold first.
Clarify why other options are incorrect: The cost of the last units sold, average cost of all units available for sale, and cost of the most recently purchased units do not align with FIFO principles. FIFO specifically uses the cost of the earliest units purchased.
Conclude that the correct answer is 'cost of the earliest units purchased,' as this matches the FIFO method's assumption in a perpetual inventory system.
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