Question

Using a perpetual inventory system, when a company records a sale of merchandise, it must also record _________. (check all that apply)

1) cost of goods sold, which will be reported on the income statement
2) a decrease in its inventory
3) cost of goods sold, which will be reported on the balance sheet
4) an increase in its inventory

Answer 1

In a perpetual inventory system, recording a sale involves noting both the cost of goods sold on the income statement and a corresponding decrease in inventory; recording an increase in inventory or COGS on the balance sheet is incorrect. So, the correct option is 1.

Step-by-step explanation:

When using a perpetual inventory system, a company that records a sale of merchandise must also record a decrease in its inventory and the cost of goods sold (COGS).

• Cost of goods sold, which will be reported on the income statement.
• A decrease in its inventory, since the goods have been sold and are no longer held by the company.

It should not record an increase in inventory because the inventory has been reduced due to the sale. Also, the COGS is not reported on the balance sheet; it is an expense reported on the income statement which influences the company's net income.