Question

In determining the cost of goods sold in a periodic system:

(a) purchase discounts are deducted from net purchases.
(b) freight-out is added to net purchases.
(c) purchase returns and allowances are deducted from net purchases.
(d) freight-in is added to net purchases.

Answer 1

Determining the cost of goods sold in a periodic inventory system involves adjusting net purchases by subtracting purchase discounts and returns, while adding freight-in costs but not freight-out which is a selling expense. The correct option is c.

Step-by-step explanation:

In determining the cost of goods sold in a periodic system, there are certain calculations and adjustments that are made to the net purchases to arrive at the final figure. Importantly, purchase discounts are subtracted from net purchases as they reduce the overall cost.

Similarly, purchase returns and allowances are also deducted from net purchases because they represent the reduction in the cost of goods due to returned goods or granted allowances.

However, it's essential to note that freight-in costs, which are the shipping costs associated with getting the goods to the store or warehouse, are added to net purchases as these costs are part of the overall cost of obtaining the inventory.

On the other hand, freight-out costs, which are related to delivering goods to customers, are not added to net purchases because they are considered selling expenses and not a part of inventory cost. The correct option is c.