Under a periodic inventory system, how is the cost of goods sold (COGS) determined at the end of the accounting period?

• A. By subtracting ending inventory from the sum of beginning inventory and purchases
• B. By continuously updating inventory balances after every purchase and sale
• C. By recording COGS with each sale throughout the period
• D. By using the lower of cost or market rule for each sale

Answer: (A)

Verified step by step guidance

1. Understand the periodic inventory system: In this system, inventory balances are not updated continuously after each transaction. Instead, inventory is updated at the end of the accounting period.
2. Recall the formula for calculating Cost of Goods Sold (COGS) under a periodic inventory system: \( \text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory} \). This formula helps determine the cost of goods sold by considering the changes in inventory over the period.
3. Identify the components of the formula: \( \text{Beginning Inventory} \) is the inventory at the start of the period, \( \text{Purchases} \) are the goods bought during the period, and \( \text{Ending Inventory} \) is the inventory remaining at the end of the period.
4. Understand why the other options are incorrect: The periodic inventory system does not continuously update inventory balances after every purchase and sale, nor does it record COGS with each sale. The lower of cost or market rule is used for inventory valuation, not for calculating COGS.
5. Apply the formula at the end of the accounting period: Add \( \text{Beginning Inventory} \) and \( \text{Purchases} \), then subtract \( \text{Ending Inventory} \) to determine the COGS for the period.