Chapter 7 Notes.pdf - Chapter 7 Notes Inventory and Cost of...

This preview shows page 1 - 3 out of 6 pages.

1 Chapter 7 Notes Inventory and Cost of Goods Sold Many companies are in the business of selling goods, rather than services Manufacturers produce and sell goods, wholesalers purchase and resell completed goods, and retailers sell those goods directly to the public In accounting, these goods are referred to as Inventory and classified as current assets - Inventory – tangible property that is (1) held for sale in the normal course of business or (2) used in producing goods or services available for sale The nature of the company’s business will dictate the type of inventory they maintain - Merchandisers (wholesale/retail) hold merchandise inventory , which are goods or merchandise held for sale in the ordinary course of business that are acquired in a finished condition and are ready for sale - Manufacturers hold 3 types of inventory: 1. Raw Materials – items acquired for processing into finished goods; they remain in Raw Materials Inventory until used and transferred to Work in Process Inventory 2. Work in Process – goods in process of being manufactured, but not yet complete 3. Finished Goods – manufactured goods that are complete and ready for sale Once a company sells inventory, the associated expense that must be matched to the related revenue is called the Cost of Goods Sold (COGS) There are 3 stages of the inventory cycle we must consider: 1. Determining initial cost of inventory 2. Allocating costs between goods sold and goods remaining in inventory 3. Evaluating the net realizable value of inventory-on-hand 1. Determining Initial Cost of Inventory Goods are initially recorded at the sum of all costs incurred to bring the inventory to a usable or salable condition and location Costs typically include: - Invoice Price (cost to obtain raw materials or finished goods from third party) - Plus: Purchase-related expenditures Freight-in (cost to ship goods to the business) Inspection costs (cost to check purchased goods are complete and in good condition) Preparation costs (e.g., costs to unpack and shelve goods) - Plus: Manufacturing expenditures (for manufacturers only) Direct labor (earnings of employees working directly to produce manufactured good) Factory overhead (manufacturing costs not directly related to the invoice price or labor, such as supervisor salaries and factory utility expenditures) - Less: Purchase returns and allowances (unsatisfactory goods returned/discounted) - Less: Purchase discounts (reductions to invoice price for early payment) These costs are accumulated in the inventory accounts (Dr asset) until they are ready for sale All costs after inventory is ready for sale (e.g., freight-out, marketing) are typically included in the Selling, General, and Administrative Expense (SGA) account Allocation to COGS vs. SGA matters for determining Gross Profit (Net Sales – COGS)
2 2. Allocating Costs between Goods Sold and Ending Inventory When goods are sold, they are removed (credited) from the Inventory account and the cost of

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture