AFM 101 Chapter 8.docx

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University of Waterloo
Accounting & Financial Management
AFM 101
Jyothika Grewal

Chapter 8. Reporting and Interpreting Cost of Sales and Inventory NATUREOFINVENTORYANDCOSTOFSALES  Items included in inventory Inventory is tangible property that is either 1.held for sale in the normal course of business or 2.used to produce goods or services for sale. Inventory is reported on the statement of financial position as a current asset because it normally is used or converted into cash within one year or within the next operating cycle of the business, whichever is longer  Merchandise inventory Goods held for resale in the normal course of business. The goods usually are acquired in a finished condition and are ready for sale without further processing. Manufacturing businesses hold the following types of inventory Raw materials inventory: includes items acquired for the purpose of processing into finished goods. Work-in-process inventory: includes goods in the process of being manufactured. Finished goods inventory: includes manufactured goods that are complete and available for sale.  Flow of Inventory Costs 1.merchandise When merchandise is purchased, the merchandise inventory account is increased. When the goods are sold, the merchandise inventory is decreased and the cost of sales is increased. 2.Manufacturing Nature of Cost of Sales Cost of sales(COS) is directly related to sales revenue. The COST OF GOODS AVAILABLE FOR SALE refers to the sum of the cost of beginning inventory and the cost of purchases (or additions to finished goods) for the period. COST OF SALES EQUATION: BI+P-EI=COS T-account: Merchandise Inventory(A) Beginning inventory 1 Purchases of inventory 9 Cost of sales
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