Under a perpetual inventory system, how is the Cost of Goods Sold (COGS) determined when a sale occurs?

• A. COGS is calculated only at the end of the accounting period using a physical count.
• B. COGS is not recorded until payment is received from the customer.
• C. COGS is estimated using the predetermined overhead rate.
• D. COGS is updated continuously with each sale based on the actual cost of inventory sold.

Answer: (D)

Verified step by step guidance

1. Understand the perpetual inventory system: In a perpetual inventory system, inventory records are updated continuously to reflect purchases and sales. This system provides real-time tracking of inventory levels and costs.
2. Recognize the role of Cost of Goods Sold (COGS): COGS represents the direct costs associated with the production or purchase of goods that are sold during a specific period. It is an expense recorded on the income statement.
3. Identify how COGS is determined in a perpetual inventory system: When a sale occurs, the system automatically calculates and updates COGS based on the actual cost of the inventory sold. This is done in real-time, ensuring accurate financial reporting.
4. Contrast with other methods: Unlike periodic inventory systems, where COGS is calculated at the end of the accounting period using a physical count, the perpetual system continuously updates COGS without waiting for a physical inventory count.
5. Understand the implications: The perpetual inventory system provides timely and accurate financial information, which is crucial for decision-making and maintaining proper inventory control.