Introduction to Inventory and Cost of Goods Sold

Inventory is merchandise purchased by merchandisers (retailers, wholesalers, distributors) for the intend of being sold to customers. The cost of the merchandise purchased but not yet sold is reported in the account Inventory or Merchandise Inventory.

Inventory is reported as a current asset in defense to the company’s report sheet. Inventory is a significant asset that needs to be monitored to the side of. Too much inventory can result in cash flow problems, added expenses (e.g., storage, insurance), and losses if the items become archaic. Too tiny inventory can repercussion in drifting sales and free customers. QB Online allows you track 3 different types of items, inventory item, non inventory item, service.

Because of the cost principle, inventory is reported regarding the balance sheet at the amount paid to obtain bond of the merchandise, not at its selling price. If you want more detail about this Contact QuickBooks Online Support.

Inventory is moreover a significant asset of manufacturers. However, in order to simplify our fable, we will focus upon a retailer.

Cost of Goods Sold

Price of goods sold is the price of the merchandise that was sold to customers. The cost of goods sold is reported on the income statementwhen the sales revenues of the goods sold are reported.

A retailer’s cost of goods sold includes the cost from its supplier gain any new costs necessary to acquire the merchandise into inventory and ready for sale. For example,let’s assume Corner Shelf Bookstore purchases a bookish textbook from a publisher. If Corner Shelf’s cost from the publisher is $80 for the textbook plus $5 in shipping costs, Corner Shelf reports $85 in its Inventory account until the photograph album is sold. When the book is sold, the $85 is removed from inventory and is reported as cost of goods sold on the subject of the pension avowal.

When Costs Change

If the publisher increases the selling prices of its books, the bookstore will have a following cost for the neighboring-door book it purchases from the publisher. Any books in the bookstore’s inventory will continue to be reported at their cost considering purchased. For example, if the Corner Shelf Bookstore has around its shelf a stamp album that had a cost of $85, Corner Shelf will continue to relation the cost of that one wedding album at its actual cost of $85 though the same scrap book now has a cost of $90. The cost principle will not come clean an amount again cost to be included in inventory.

Let’s find the maintenance for a favorable response the Corner Shelf Bookstore had one sticker album in inventory at the begin of the year 2016 and at interchange time during 2016 purchased four identical books. During the year 2016 the cost of these books increased due to a paper shortage. The in the company of chart shows the costs of the five books that have to be accounted for. It along with assumes that none of financial upholding has been sold as of December 31, 2016.

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Cost Flow Assumptions

We have some Accounting rules that allow the bookstore to move the cost from inventory to the cost of goods sold with the help of these three cost flows:

  • First In, First Out (FIFO)

  • Last In, First Out (LIFO)

  • Average

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