1. What is the difference between inventory and cost of goods sold? Cost of good
ID: 2373767 • Letter: 1
Question
1. What is the difference between inventory and cost of goods sold? Cost of goods sold and sales revenue?
2. Is gross profit an account?
3. Comstock Company counted their inventory at the end of the year and had 220 units. Included in that amount were 20 units Comstock held on consignment from Davidson Inc. Comstock purchased 50 units of inventory on December 27, FOB shipping point. How many units of inventory should Comstock report on its year-end balance sheet?
4. Assume Comstock was unable to count its ending inventory because it was destroyed in a fire. Use the gross profit method to estimate the ending inventory. The gross profit rate is 52%.
Beginning inventory
Ending inventory
Net purchases
Net sales
$ 10,000
?
110,000
175,000
Beginning inventory
Ending inventory
Net purchases
Net sales
$ 10,000
?
110,000
175,000
Explanation / Answer
Cost of Goods Sold :Cost of goods sold reflects the production and shipping expenses related to selling a product. Normally the greatest expense on an income statement, cost of goods is calculated by adding the cost of goods purchased to the value of inventory at the beginning of the year, plus the cost of freight, minus the value of inventory at the end of the period.
Valuing Inventory :Inventory as valued plays a significant role in the calculation of Cost of Goods sold. The two most common inventory valuation methodologies are First-In-First-Out and Last-In-First-Out. FIFO assumes that the first goods produced are the first sold, meaning that the when a good is sold the expense related to producing the first item of merchandise is recognized. LIFO assumes the opposite, so that the latest produced goods are the first sold and the expense of producing the last item of merchandise is recognized. Since objects that are produced later are generally more expensive, the LIFO tends to increases the cost of goods sold which decreases income for both tax and reporting purposes.
Cost of goods sold refers to the inventory costs of the goods a business has sold during a particular period. Costs are associated with particular goods by using one of several formulas, including specific identification, first-in-first-out , or average cost. Costs include all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Costs of goods made by the business include material, labor, and allocated overhead. The costs of those goods not yet sold are deferred as costs of inventory until the inventory is sold or written down in value.
Many businesses sell goods that they have bought or produced. When the goods are bought or produced, the costs associated with such goods are capitalized as part of inventory (or stock) of goods. These costs are treated as an expense during the period in which the business recognizes income from sale of the goods.
Inventory = number of units of inventory on hand x cost per unity of inventory
Any profit not collected is deferred on the balance sheet pending cash collection from the customer. When collections are subsequently made, realized gross profit is increased via a debit to the deferred gross profit account.
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