When a product is sold, how is the Cost of Goods Sold (COGS) reported in the profit and loss statement under the perpetual inventory system?

• A. COGS is recorded immediately at the time of each sale.
• B. COGS is recorded only when inventory is purchased.
• C. COGS is not reported in the profit and loss statement.
• D. COGS is only calculated and recorded at the end of the accounting period.

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 materials and labor. It is reported in the profit and loss statement to reflect the expense associated with the goods sold during a specific period.
2. Learn about the perpetual inventory system: Under this system, inventory records are updated continuously to reflect purchases and sales. This means that every time a sale occurs, the inventory and COGS are adjusted immediately.
3. Analyze how COGS is recorded under the perpetual inventory system: When a product is sold, the system automatically reduces the inventory account and records the COGS in the profit and loss statement at the same time. This ensures real-time tracking of inventory and expenses.
4. Compare the options provided in the problem: Evaluate each statement to determine which aligns with the perpetual inventory system. For example, 'COGS is recorded immediately at the time of each sale' is consistent with the perpetual inventory system, while other options like 'COGS is only calculated and recorded at the end of the accounting period' describe the periodic inventory system instead.
5. Conclude the correct reporting method: Based on the perpetual inventory system, COGS is recorded immediately at the time of each sale, ensuring accurate and timely financial reporting in the profit and loss statement.