Which of the following statements best describes how Cost of Goods Sold (COGS) is determined under the perpetual inventory system compared to the periodic inventory system?

• A. Under both systems, COGS is only calculated at the end of the accounting period.
• B. COGS is unaffected by the choice between perpetual and periodic inventory systems.
• C. The perpetual system requires a physical inventory count to determine COGS, while the periodic system does not.
• D. Under the perpetual system, COGS is updated continuously with each sale, while under the periodic system, COGS is calculated at the end of the period.

Answer: (D)

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.
2. Learn the difference between perpetual and periodic inventory systems: The perpetual inventory system updates inventory records and COGS continuously with each transaction, while the periodic inventory system updates these records only at the end of the accounting period.
3. Analyze how COGS is calculated under the perpetual inventory system: In this system, every sale triggers an immediate update to COGS based on the cost of the items sold, using real-time inventory tracking.
4. Analyze how COGS is calculated under the periodic inventory system: In this system, COGS is determined at the end of the accounting period by using the formula: \( \text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory} \). This requires a physical inventory count.
5. Compare the two systems: Under the perpetual system, COGS is continuously updated, providing real-time insights into inventory and sales. Under the periodic system, COGS is calculated retrospectively, relying on periodic inventory counts and adjustments.