In a perpetual inventory system, cost of goods sold is recorded
a.on a daily basis.
b.on a monthly basis.
c.on an annual basis.
d.with each sale.
The correct answer and explanation is :
Correct Answer:
d. with each sale.
Explanation:
In a perpetual inventory system, the cost of goods sold (COGS) is recorded with each sale, meaning inventory records are updated continuously. This system contrasts with a periodic inventory system, where inventory is updated at specific intervals (e.g., monthly or annually).
How the Perpetual Inventory System Works:
- Real-Time Inventory Tracking
- Each time a sale occurs, the inventory system immediately records the reduction in inventory and calculates the cost of goods sold.
- This is typically done using computerized point-of-sale (POS) systems, barcode scanning, or enterprise resource planning (ERP) software.
- Accurate Financial Reporting
- Since COGS is updated with each transaction, businesses can generate up-to-date financial statements at any time.
- This provides better insights into profitability, cost control, and inventory levels.
- Inventory Control and Management
- Companies using a perpetual system can easily track stock levels, preventing overstocking or stockouts.
- It also helps in detecting shrinkage, theft, or discrepancies faster.
- Use of FIFO, LIFO, or Weighted Average Methods
- The system can automatically apply inventory valuation methods (First-In-First-Out, Last-In-First-Out, or Weighted Average) to determine COGS.
Advantages of a Perpetual Inventory System:
- Accurate tracking of inventory and COGS.
- Reduces human errors compared to manual recording.
- Improves decision-making with real-time data.
- Enhances customer service by preventing stockouts.
In contrast, a periodic inventory system (where COGS is recorded monthly or annually) is often used by smaller businesses that do not require real-time tracking.
Here is an illustration of a perpetual inventory system, showing real-time inventory tracking, a digital POS system, barcode scanning, and inventory updates.