Chapter 8. Reporting and Interpreting
Cost of Sales and Inventory
Items included in inventory
Inventory is tangible property that is either
1.held for sale in the normal course of business
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
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
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
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
COST OF SALES EQUATION: BI+P-EI=COS
Beginning inventory 1
Purchases of inventory 9 Cost of sales