Ch 7 Reporting and Interpreting cost of Goods sold and Inventory

Ch 7 Reporting and Interpreting cost of Goods sold and Inventory

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Ch 7 Reporting and Interpreting Cost of Goods sold and Inventory A. Items Included in Inventory 1. Inventory is tangible property that is a. Held for sale in the normal course of business, or b. Used to produce goods or services for sale. 2. Balance sheet: classified as a current asset; below Cash, Marketable Securities, and Accounts and Finance Receivables because it is less liquid than those assets. 3. The types of inventory normally held depend on the characteristics of the business. a. Merchandise inventory includes goods (merchandise) held for resale in the ordinary course of business. b. Raw materials inventory (RM) includes items acquired for processing into finished goods. c. Work in process inventory (WIP) includes goods in the process of being manufactured but not yet complete. d. Finished goods inventory (FG) is manufactured items that are complete and ready for sale. B. Costs Included in Inventory Purchases 1. 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. Cost accumulation should cease when the item is ready for use (raw materials) or ready for shipment (merchandise inventory). 3. Flow of inventory costs a. Merchandiser 1. Cost to acquire a. Price paid (or cash equivalent) b. Freight-in (transportation) c. Other costs to make it ready for sale 2. Merchandiser activities a. Purchase: increase merchandise inventory (at cost) b. Sale: decrease merchandise inventory (at cost) and increase cost of goods sold (at cost) b. Manufacturer 1. Costs to make (manufacture) a. RM used including freight-in b. Direct labor costs for wages of persons working directly on the transformation of raw materials into finished goods c. Factory overhead costs (which include costs other than direct materials and direct labor costs) are costs associated with and necessary for production. Costs include factory rent, factory utilities, factory supervision, and patent amortization 2. Manufacturer activities 1
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C. Nature of Cost of Goods Sold (Income Statement) Beginning inventory + Cost of purchases of merchandise during the period Goods available for sale - Ending inventory Cost of goods sold D. Cost Flow Assumptions: Alternative ways of valuing COGS and Ending Inventory
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Ch 7 Reporting and Interpreting cost of Goods sold and Inventory

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