If a company determines cost of goods sold each time a sale occurs, it
a.must have a computer accounting system.
b.uses a combination of the perpetual and periodic inventory systems.
c.uses a periodic inventory system.
d.uses a perpetual inventory system.
The correct answer and explanation is :
Correct Answer:
d. uses a perpetual inventory system.
Explanation:
A company that determines the cost of goods sold (COGS) each time a sale occurs uses a perpetual inventory system. This system continuously updates inventory records and cost data in real time, reflecting changes after every transaction, whether it is a sale, return, or purchase.
How the Perpetual Inventory System Works
Under a perpetual inventory system, each sale triggers an immediate update in inventory records. When a sale occurs:
- The inventory balance decreases by the quantity sold.
- The COGS is recorded simultaneously with the sales transaction.
- The accounting system updates inventory to reflect real-time stock levels.
This process contrasts with the periodic inventory system, where inventory updates happen only at the end of an accounting period through a physical count. In the periodic system, COGS is calculated using the formula:
[
COGS = \text{Beginning Inventory} + \text{Purchases} – \text{Ending Inventory}
]
Since the periodic system does not track COGS after every sale, it cannot determine COGS immediately after each transaction.
Advantages of the Perpetual Inventory System
- Accurate Inventory Tracking: Helps prevent stock shortages or overages.
- Real-Time Financial Information: Businesses get instant insights into inventory costs.
- Efficient Loss Control: Detects theft or discrepancies quickly.
Who Uses Perpetual Inventory?
Retailers, e-commerce businesses, and manufacturers often use perpetual inventory systems, especially with barcode scanning and computerized accounting software to automate updates.
Thus, since COGS is determined immediately upon each sale, the correct answer is (d) uses a perpetual inventory system.