Which of the following statements best describes how the 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. 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.
• C. The perpetual system requires a physical count to determine COGS, while the periodic system does not.
• D. COGS is unaffected by the choice between perpetual and periodic inventory 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.
2. Learn the perpetual inventory system: In this system, inventory records are updated continuously with each purchase and sale. COGS is calculated in real-time whenever a sale occurs, using the inventory data.
3. Learn the periodic inventory system: In this system, inventory records are not updated continuously. Instead, a physical count of inventory is performed at the end of the accounting period, and COGS is calculated using the formula: \( \text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory} \).
4. Compare the two systems: Under the perpetual system, COGS is updated continuously with each sale, providing real-time data. Under the periodic system, COGS is calculated only at the end of the accounting period after a physical inventory count.
5. Clarify misconceptions: The perpetual system does not require a physical count to determine COGS, as it relies on continuous updates. However, a physical count may still be performed periodically to verify inventory accuracy. The choice between systems does affect how COGS is calculated and recorded.