Companies must have a carefully constructed inventory policy in order to:

• A. accurately determine the cost of goods sold under both perpetual and periodic inventory systems
• B. avoid recording any inventory transactions during the accounting period
• C. ensure that all inventory is expensed immediately upon purchase
• D. eliminate the need for physical inventory counts entirely

Answer: (A)

Verified step by step guidance

1. Understand the purpose of an inventory policy: Inventory policies are designed to ensure accurate tracking and valuation of inventory, which is crucial for determining the cost of goods sold (COGS) and maintaining proper financial records.
2. Recognize the difference between perpetual and periodic inventory systems: A perpetual system continuously updates inventory records, while a periodic system updates inventory records at specific intervals, typically at the end of an accounting period.
3. Identify the role of inventory policies in COGS calculation: Inventory policies help establish consistent methods for valuing inventory, such as FIFO (First-In, First-Out), LIFO (Last-In, First-Out), or weighted average cost, which directly impact the calculation of COGS.
4. Clarify misconceptions about inventory policies: Inventory policies do not aim to avoid recording transactions, expense inventory immediately upon purchase, or eliminate physical inventory counts. Instead, they ensure accurate tracking and valuation of inventory.
5. Conclude the correct answer: The correct purpose of an inventory policy is to accurately determine the cost of goods sold under both perpetual and periodic inventory systems, as this supports reliable financial reporting and decision-making.