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Lecture Financial accounting: Chapter 7 - Robert Libby, Patricia A. Libby, Daniel G. Short

Chapter 7 - Reporting and interpreting cost of goods sold and inventory. In this chapter students will be able to: Apply the cost principle to identify the amounts that should be included in inventory and the matching principle to determine cost of goods sold for typical retailers, wholesalers, and manufacturers; report inventory and cost of goods sold using the four inventory costing methods; decide when the use of different inventory costing methods is beneficial to a company;. | Reporting and Interpreting Cost of Goods Sold and Inventory Chapter 7 Chapter 7: Reporting and Interpreting Cost of Goods Sold and Inventory. Flow of Inventory Costs Merchandise Purchases Cost of Goods Sold Merchandise Inventory Merchandiser Raw Materials Raw Materials Inventory Work in Process Inventory Finished Goods Inventory Cost of Goods Sold Manufacturer Direct Labor Factory Overhead A merchandiser purchases inventory that is in ready to sell condition. When merchandise inventory is purchased, the merchandise inventory account is increased. When the goods are sold, cost of goods sold is increased and merchandise inventory is decreased. The flow of inventory for a manufacturer is more complex. First, a manufacturer purchases raw materials for use in making inventory. The items (and their costs) are included in raw materials inventory until they are used, at which point they become part of work in process inventory. As goods are manufactured, two other costs of manufacturing, direct labor and factory overhead, are also added. Direct labor refers to earnings of employees who work directly on the products being manufactured. Factory overhead includes manufacturing costs such as the costs of heat, light, and power to operate the factory. When the inventory is complete and ready for sale, the related amounts of work in process inventory are transferred to finished goods inventory. When the finished goods are sold, cost of goods sold is increased and finished goods inventory decreases. Nature of Cost of Goods Sold Beginning Inventory Purchases for the Period Ending Inventory (Balance Sheet) Goods Available for Sale Cost of Goods Sold (Income Statement) Beginning inventory + Purchases = Goods Available for Sale Goods Available for Sale – Ending inventory = Cost of goods sold Cost of goods sold is an expense account. Cost of goods sold is calculated by multiplying the number of units sold by their unit costs. Let’s examine the relationship between cost of | Reporting and Interpreting Cost of Goods Sold and Inventory Chapter 7 Chapter 7: Reporting and Interpreting Cost of Goods Sold and Inventory. Flow of Inventory Costs Merchandise Purchases Cost of Goods Sold Merchandise Inventory Merchandiser Raw Materials Raw Materials Inventory Work in Process Inventory Finished Goods Inventory Cost of Goods Sold Manufacturer Direct Labor Factory Overhead A merchandiser purchases inventory that is in ready to sell condition. When merchandise inventory is purchased, the merchandise inventory account is increased. When the goods are sold, cost of goods sold is increased and merchandise inventory is decreased. The flow of inventory for a manufacturer is more complex. First, a manufacturer purchases raw materials for use in making inventory. The items (and their costs) are included in raw materials inventory until they are used, at which point they become part of work in process inventory. As goods are manufactured, two other costs of .