Which of the following formulas correctly computes the company's total cost of merchandise purchased for the year under both perpetual and periodic inventory systems?

• A. Net Purchases = Sales - Cost of Goods Sold
• B. Net Purchases = Beginning Inventory + Purchases - Ending Inventory
• C. Net Purchases = Purchases - Freight-In + Purchase Discounts
• D. Net Purchases = Purchases + Freight-In - Purchase Returns and Allowances - Purchase Discounts

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of 'Net Purchases'. Net Purchases represent the total cost of merchandise acquired by a company during a specific period, adjusted for any reductions such as purchase returns, allowances, and discounts.
2. Step 2: Analyze the components of the formula provided in the problem. The correct formula for Net Purchases is: Net Purchases = Purchases + Freight-In - Purchase Returns and Allowances - Purchase Discounts.
3. Step 3: Break down each term in the formula: 'Purchases' refers to the total cost of goods bought, 'Freight-In' includes transportation costs paid by the buyer to bring goods to their location, 'Purchase Returns and Allowances' are reductions in cost due to returned goods or allowances for defective merchandise, and 'Purchase Discounts' are reductions in cost due to early payment or other incentives.
4. Step 4: Compare the correct formula to the other options provided in the problem. For example, the formula 'Net Purchases = Sales - Cost of Goods Sold' is incorrect because it relates to sales activity, not purchases. Similarly, 'Net Purchases = Beginning Inventory + Purchases - Ending Inventory' is incorrect because it calculates inventory changes, not net purchases. Lastly, 'Net Purchases = Purchases - Freight-In + Purchase Discounts' is incorrect because it excludes Freight-In and misplaces Purchase Discounts.
5. Step 5: Conclude that the correct formula for computing Net Purchases under both perpetual and periodic inventory systems is: Net Purchases = Purchases + Freight-In - Purchase Returns and Allowances - Purchase Discounts. This formula accounts for all relevant adjustments to the cost of merchandise purchased.