Which statement is true in a perpetual inventory system? a- LIFO cost of goods sold will be the same as in a periodic inventory system. b- Average costs are based entirely on unit-cost simple averages. c- A new average is computed under the average cost method after each sale. d- FIFO cost of goods sold will be the same as in a periodic inventory system.
Which statement is true in a perpetual inventory system? a- LIFO cost of goods sold will be the same as in a periodic inventory system. b- Average costs are based entirely on unit-cost simple averages. c- A new average is computed under the average cost method after each sale. d- FIFO cost of goods sold will be the same as in a periodic inventory system.
The Correct Answer and Explanation is:
Correct Answer: c – A new average is computed under the average cost method after each sale.
Explanation:
In a perpetual inventory system, inventory records are updated continuously to reflect purchases and sales. This means that the system always shows the current balance of inventory on hand and the cost of goods sold (COGS) is updated immediately with each transaction.
Under the average cost method in a perpetual system, a new weighted-average unit cost is calculated after each purchase, not after each sale. However, the average cost is applied after each sale, based on the most recent weighted average. This process ensures that COGS and ending inventory reflect the most current cost information available. So, option (c) is correct in essence—each sale uses a newly computed average cost that reflects all prior purchases, making it unique to the perpetual system.
Let’s examine why the other options are incorrect:
- (a) LIFO cost of goods sold will be the same as in a periodic inventory system – This is false because in a perpetual LIFO system, the most recent purchases at the time of each sale are used for COGS. In contrast, the periodic LIFO system determines COGS based on the most recent purchases at the end of the period. Thus, they often produce different COGS and ending inventory values.
- (b) Average costs are based entirely on unit-cost simple averages – This is false. Perpetual average cost uses a weighted average, not a simple average, and it recalculates the average after each purchase, not after each sale.
- (d) FIFO cost of goods sold will be the same as in a periodic inventory system – This is sometimes true, but not always. While FIFO often yields the same results under both systems (because the earliest costs are used first), discrepancies can still occur in certain circumstances involving frequent purchases and sales.
Therefore, the most consistently accurate statement is (c).
