Inventory and Cost of Goods Sold

Outflow of resources caused by the sale of inventory

Cost of goods sold impacts gross profit

Purchases

Cost of merchandise acquired for resale

Intended for Sale

Differentiates inventory from other assets

Merchandisers

Companies that purchase inventory for resale

Manufacturers

Companies that transform raw materials into finished products

Finished Goods

Cost of final product available for sale

Inventory account is updated in the adjustment phase

Closing temporary inventory accounts and adjusting for COGS

FOB Shipping Point

Buyer pays transportation costs, included in inventory

Periodic Inventory System

COGS recorded only at the end of a period

Gross Profit

Amount left to pay operating expenses and provide net income

Raw Materials

Basic ingredients used to make a product

Perpetual Inventory System

COGS updated with each sale

Purchase Discounts

Early pay discounts reduce inventory

Physical inventory counts should match the inventory records

Ensuring accuracy of inventory

Historical Cost basis

Exchange price at the time of the activity

Cost of goods sold is the cost to the seller of all inventory sold during the accounting period.

Expense recognized in the same period as revenue

Cost of Goods Sold

Expense when inventory is sold

Revenue - COGS = Gross Profit

Formula to calculate gross profit

Transportation/Shipping cost

Included in inventory if buyer's legal responsibility

Current Asset

Inventory is classified as a current asset

Challenges related to inventory

Inventory purchasing, tracking, managing, protecting, calculating COGS

Recorded at acquisition cost

Inventory value is based on purchase price

Inventory

Tangible resource held for resale in normal operations

Purchase Allowances

Price concession for defective merchandise reduces inventory

Adjustments for discounts and returns are tracked separately

Purchase Returns and Purchase Discounts accounts

Recorded at cost

Purchase price plus cost of bringing goods to salable condition

Work in Process

Raw materials used in production plus other production costs

Sales Returns and Allowances

Requires two entries under perpetual system

Gross Margin

Resources left after deducting cost of goods sold

Purchase Returns

Returned merchandise reduces inventory

Net Method

Returns and allowances liability is debited

Gross Method

Revenue account is debited

FOB Destination

Seller pays transportation costs, included as expense