Which of the following best describes the primary difference in calculating Cost of Goods Sold (COGS) under the perpetual inventory system versus the periodic inventory system?

• A. In the perpetual system, COGS is updated continuously with each sale, while in the periodic system, COGS is determined at the end of the period.
• B. COGS is always higher under the perpetual system than under the periodic system.
• C. In the perpetual system, inventory purchases are only recorded at the end of the period, while in the periodic system, purchases are recorded continuously.
• D. The perpetual system does not require physical inventory counts, while the periodic system does not require any inventory records.

Answer: (A)

Verified step by step guidance

1. Understand the concept of Cost of Goods Sold (COGS): COGS represents the direct costs attributable to the production of goods sold by a company, including the cost of materials and labor.
2. Learn the perpetual inventory system: In this system, inventory records are updated continuously as transactions occur, including purchases and sales. COGS is calculated and recorded immediately with each sale.
3. Learn the periodic inventory system: In this system, inventory records are not updated continuously. Instead, inventory counts are performed at the end of the accounting period, and COGS is calculated using the formula: \( \text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory} \).
4. Compare the two systems: The primary difference is that the perpetual system updates COGS continuously with each sale, while the periodic system calculates COGS at the end of the period after performing a physical inventory count.
5. Clarify misconceptions: The perpetual system does not eliminate the need for physical inventory counts entirely, as these are still necessary for verifying records. Additionally, COGS is not inherently higher or lower in one system compared to the other; it depends on the accuracy of inventory tracking and accounting practices.