Cost of Goods Sold (COGS) is characterized by which of the following statements?

• A. COGS does not affect the calculation of gross profit.
• B. Under the perpetual inventory system, COGS is updated continuously with each sale.
• C. Under the periodic inventory system, COGS is updated after every purchase.
• D. COGS is only calculated at the end of the year in both perpetual and periodic systems.

Answer: (B)

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 a key component in calculating gross profit, which is determined as Sales Revenue minus COGS.
2. Differentiate between perpetual and periodic inventory systems: In the perpetual inventory system, inventory and COGS are updated continuously with each sale or purchase. In contrast, the periodic inventory system updates inventory and calculates COGS at specific intervals, typically at the end of an accounting period.
3. Analyze the statement 'COGS does not affect the calculation of gross profit': This is incorrect because COGS directly impacts gross profit calculation. Gross profit is calculated as Sales Revenue minus COGS, so any change in COGS will affect gross profit.
4. Evaluate the statement 'Under the perpetual inventory system, COGS is updated continuously with each sale': This is correct. The perpetual system uses real-time updates to track inventory and COGS, ensuring accurate records after each transaction.
5. Assess the statement 'Under the periodic inventory system, COGS is updated after every purchase': This is incorrect. In the periodic system, COGS is calculated at the end of the accounting period, not after every purchase or sale.