Star Company recognized $500 of cost of goods sold. Note that Star is only recording the cost of goods sold part of the transaction and not the sales revenue. Star uses the perpetual inventory system. Which of the following answers reflects the effect of recognizing the cost of goods sold on the financial statements?

Question

Quizplus · Accepted Answer

Recognizing the cost of goods sold decreases inventory (asset) and increases cost of goods sold (expense) on the income statement. Option A is incorrect because it shows an increase in inventory which is incorrect because cost of goods sold is being recognized. Option C is incorrect because it shows an increase in revenue which is not being recognized in this transaction. Option D is incorrect because it shows an increase in net income which is incorrect because cost of goods sold is an expense and decreases net income.

Star Company Recognized $500 of Cost of Goods Sold