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CHAPTER 7 – REPORTING & INTERPRETING COST OF GOODS SOLD AND INVENTORY 1. Inventory is a major concern to all merchandisers and manufacturers. 2. Beginning and ending inventories are used in the calculation of cost of goods sold on the income statement. 3. A good accounting system is an important factor to furnish information for proper inventory management. It should provide for accurate data, timely information, and the protection of the inventory assets. I. APPYING THE COST PRINCIPLE TO VALUE INVENTORY AND THE MATCHING PRINCIPLE TO DETERMINE COST OF GOODS SOLD A. Items Included in Inventory 1. Inventory is held for resale to customers 2. Reported on the balance sheet as a current asset, below Cash, Marketable Securities, and Accounts Receivables because it is less liquid than those assets. 3. The types of inventory normally held depend on the characteristics of the business. B. Costs Included in Inventory Purchases 1. Goods in inventory are initially recorded at cost. 2. Inventory cost includes the purchase price, plus any other costs incurred in bringing the inventory item to usable or salable condition and location. 3. Flow of inventory costs a. Merchandiser 1. Cost to acquire: a. Price paid (or cash equivalent) b. Add Freight-in (If inventory is purchased FOB shipping point ) c. Subtract purchase returns, allowances, and discounts C. Nature of Cost of Goods Sold 1. The cost (to the seller) of the items that were sold. 2. Subtracted from net sales on the income to derive gross profit. Beginning inventory + Net purchases (Purchases – returns, allowances, discts. + freight-in) Goods available for sale - Ending inventory Cost of goods sold 1
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3. Note that the ending inventory from one accounting period becomes the beginning inventory of the next period. II. REPORTING INVENTORY AND COST OF GOODS SOLD USING THE FOUR INVENTORY COSTING METHODS. A. Cost Flow Assumptions 1. The inventory costing methods are alternative ways to assign the total dollar amount of goods available for sale between a. Ending inventory, and b. Cost of goods sold 2. There are four basic inventory costing methods; each provides an alternative way of assigning the cost of goods available to cost of goods sold and ending inventory.
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