ACCT1021 Chapter Notes - Chapter 7: Inventory Turnover, Net Income, Retained Earnings

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Chapter Seven
10/17/16
Reporting and Interpreting Cost of Goods Sold and Inventory
Understanding the Business
Cost of goods sold: cost of the products sold
Inventory:
o Cost of goods sold is subtracted from net sales to product gross profit
Goal of inventory management have sufficient quantities of high quality
inventory available to serve customers needs while minimizing the costs of
inventory
Accounting system must:
o Provide accurate information for preparation of periodic financial
statements and tax returns
o Provide up to date information on inventory quantities and costs to
facilitate ordering and manufacturing decisions
o Provide the information needed to help protect important assets
Manufacturer:
Wholesaler: sold to independent dealers
Retailers: independent dealers who sell the products to the public
Nature of Inventory and the Cost of Goods Sold
Items Included in Inventory
Inventory: tangible property that is held for sale in the normal course of business
or used to produce goods or services for sale
o Reported as current asset
Merchandise inventory: goods held for resale in the normal course of business;
acquired in a finished condition and are ready for sale
Raw materials inventory: items acquired for processing into finished goods
Work in process inventory: goods in the process of being manufactured but not
yet complete
Finished good inventory: manufactured goods that are complete and ready for sale
Costs Included in Inventory Purchases
Good in inventory are recorded at costs
o Include the cost of the good and what you have to do to keep it in
inventory
Any purchase returns and allowances or discounts are subtracted
Flow of Inventory Costs
Merchandiser
Merchandise purchased -> merchandise inventory -> cost of goods sold
Manufacturer
Raw materials purchased -> raw materials inventory -> work in process inventory
(direct labor incurred/factory overhead incurred) -> finished goods inventory -> cost
of goods sold
Direct labor: represents the earnings of employees who work directly on the
products being manufactured
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Document Summary

Reporting and interpreting cost of goods sold and inventory. Cost of goods sold: cost of the products sold. Inventory: cost of goods sold is subtracted from net sales to product gross profit. Goal of inventory management have sufficient quantities of high quality inventory available to serve customers needs while minimizing the costs of inventory. Retailers: independent dealers who sell the products to the public. Nature of inventory and the cost of goods sold. Inventory: tangible property that is held for sale in the normal course of business or used to produce goods or services for sale: reported as current asset. Merchandise inventory: goods held for resale in the normal course of business; acquired in a finished condition and are ready for sale. Raw materials inventory: items acquired for processing into finished goods. Work in process inventory: goods in the process of being manufactured but not yet complete. Finished good inventory: manufactured goods that are complete and ready for sale.

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