Chapter 7 - Chapter 7 Reporting and Interpreting Cost of...

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Chapter 7: Reporting and Interpreting Cost of Goods Sold and Inventory NATURE OF INVENTORY AND COST OF GOODS SOLD Items included in inventory Inventory : tangible property held for sale in normal course of business or used in producing goods or services for sale; reported as CURRENT ASSET Merchandisers hold… o Merchandise inventory : goods held for resale in normal course of business; acquired in finished condition Manufacturers hold… o Raw materials inventory : acquired for processing into finished goods; when used, become “work in process” inventory o Work in process inventory : in process of being manufactured but not yet complete; when completed, becomes “finished goods” inventory o Finished goods inventory : manufactured goods complete and ready for sale Costs included in inventory purchases Inventory recorded at cost Cease accumulating purchase costs when raw materials are ready for use or merchandise inventory is ready for shipment Flow of inventory costs (merchandisers) o Purchase of merchandise = increase inventory account o Sale of merchandise = increase COGS and decrease inventory account Flow of inventory costs (manufacturers) o Purchase of raw materials = increase raw materials inventory account o Use of raw materials = decrease raw materials inventory account and increase work in process inventory account o Use of direct labor and factory overhead = increase work in process inventory Direct labor : earnings of employees who work directly on products being manufactured Factory overhead : all other manufacturing costs (ex: cost of heat, light, power) o

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