Question

Inventory for a manufacturing company includes raw materials, work in process, and finished goods. Inventory for a merchandising company includes goods primarily in finished form ready for sale. In a perpetual inventory system, inventory is continually adjusted for each change in inventory. Cost of goods sold is adjusted each time goods are sold or returned by a customer. A periodic inventory system adjusts inventory and records cost of goods sold only at the end of a reporting period.

Knowledge Check 01

Abbott Company uses a perpetual inventory system. When does Abbott record transactions relating to its inventory Multiple Choice

• Sales revenue, but not cost of goods sold, is recorded at the time of the sale.

• Sales revenue and cost of goods sold are both recorded at the time of the sale.

• Cost of goods sold is recorded only at the end of the accounting period.

• Sales revenue and cost of goods sold are both recorded only at the end of the accounting period

Answer 1

Sales revenue and cost of goods sold both are recorded at the time of the sale.

Because under the perpetual inventory system, an entity continually updates its inventory records to account for additions to and subtractions from inventory for such activities as:

• Received inventory items

• Goods sold from stock

• Items moved from one location to another

• Items picked from inventory for use in the production process

• Items scrapped