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In a perpetual inventory cost grid, which entry is made to the Inventory Balance and Cost of Sales when a sale of merchandise occurs?
AInventory balance increases; cost of sales increases
BInventory balance decreases; cost of sales increases
CInventory balance increases; cost of sales decreases
DInventory balance decreases; cost of sales decreases
Answer & Solution
Correct answer: B. Inventory balance decreases; cost of sales increases
1. A sale debits Cost of Merchandise Sold, so cost of sales increases.
2. The same sale credits Merchandise Inventory, so the inventory balance decreases.
3. Therefore inventory falls while cost of sales rises.
4. Rule out the options where cost of sales decreases, since an expense increases on a sale.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §4.1.1 "Perpetual Inventory System", p.114_
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