BU227 Chapter 8 Textbook Notes
Nature of Inventory and Cost of Sales:
Items Included in Inventory:
o Inventory is tangible property either:
Held for sale in normal course of business.
Used to produce gods/services for sale.
o Inventory is reported on the STATEMENT OF FINANCIAL POSITION.
As a CURRENT ASSET.
o Merchandise Inventory:
Goods/merchandise geld for RESALE.
Goods are normally acquired in finished condition, and ready to
o Raw Materials Inventory:
Items acquired for the purpose of processing into finished goods.
When used, become Work-in-Process inventory.
o Work-in-Process Inventory:
Goods in the process of being manufactured.
When complete, becomes finished goods inventory.
o Finished Goods Inventory:
Manufactured goods ready for sale.
Costs Included in Inventory Purchases:
o Conforms with the COST PRINCIPLE.
Cash equivalent cost. Either the price paid, or consideration given to
acquire the asset.
o Inventory cost includes the principle of the asset, along with any applicable
expenditures directly or indirectly incurred in bringing the item to a
This includes such costs as: freight, import duties, etc.
o Stop accumulating purchases costs once the materials are READY TO BE
Any additional costs related to selling the merchandise, or marketing it,
should be included in marketing and selling expenses of the period of
sale. Flow of Inventory Costs:
o Merchandisers (Wholesalers and Retailers):
Merchandise is purchased.
Merchandise inventory account increased.
Merchandise is sold
Merchandise inventory is decreased
Cost of sales is increased.
Raw Materials are purchased.
Raw materials inventory account increased.
Raw Materials are used in production.
Cost is moved from the raw materials inventory account to the
Work-in-Process inventory account.
Work-in-Process Inventory. Materials are being made into saleable
Direct labour cost is added to Work-in-Process inventory account.
o Direct labour is the earnings of employees who work
directly on product manufacturing.
Factory overhead cost is added to Work-in-Process inventory
o Factory overhead is ALL OTHER manufacturing costs that
are not raw material or direct labour costs.
Ex: salary of the factory supervisor, utilities,
security, material handling.
Goods are finished, and ready to sell.
All Work-in-Process account costs are moved to the Finished
Goods Inventory account.
Finished goods are sold.
Finished goods inventory account decreases, and Cost of Sales
o Essentially moving from Purchasing/Production Activities to Inventory on the
Statement of Financial Position, to Expense on the Income Statement.
Nature of Cost of Sales (COS):
o COS is directly related to SALES REVENUE.
Number of units sold * unit costs.
Including all costs of the merchandise purchased or finished goods
sold during the period. o Beginning Inventory (BI):
The stock of finished goods you start the accounting period with.
o Purchases (P):
Purchases are made during the period, and added to inventory.
Additions to finished goods are added here, as well.
o P + BI = Cost of Goods Available For Sale.
o Ending Inventory of Finished Goods (EI):
Goods available for sale that are left over/unsold at the end of the
The Ending Inventory of one period becomes the Beginning Inventory of
the next period.