6A:002 Berg Inventory Costs and Financial Statements Fall 2011 Page 1 Inventory Costs and Financial Statements Merchandising and Manufacturing firms store costs in inventory until the units associated with those costs are used up (by sale, theft, spoilage, or use in another department). When units are used up, their costs are moved (flow) to the account that used the units. Because an asset’s cost includes all the cost of getting that asset ready for its intended use, inventory cost includes all cost of getting the inventory ready for its intended use. This means, for example, that a merchandiser’s inventory includes the cost of shipping items to the merchandiser’s facility and a manufacturer’s raw materials inventory includes the cost of inspecting the raw materials to make sure they meet quality standards. There are many equivalent ways to envision how costs flow between accounts. The diagrams and statements on the next few pages explain this.
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