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

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

Answer: (A)

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 actual cost of the inventory sold is immediately recorded as COGS. This ensures that the financial statements reflect the most accurate and up-to-date information.
3. Clarify the incorrect options: COGS is not recorded based on customer payment (as payment timing is unrelated to inventory cost recognition), nor is it calculated only at the end of the accounting period using a physical count (this is characteristic of the periodic inventory system).
4. Explain why estimation methods like average cost are not used in this context: Under the perpetual system, the actual cost of each inventory item sold is tracked and recorded, rather than relying on estimates or averages.
5. Summarize the correct approach: In the perpetual inventory system, COGS is updated continuously with each sale based on the actual cost of the inventory sold, ensuring real-time accuracy in financial reporting.