Chapter 5—Inventory

Merchandiser Makes a profit by buying and selling merchandise. A wholesaler is an intermediary that buys goods from manufacturers or other wholesalers and sells them to retailers or other wholesalers. A retailer buys goods from manufacturers or wholesalers and sells directly to consumers

Operating cycle for Merchandisers Begins with the purchase of inventory and ends when cash is received from selling the inventory.

Manufacturer Makes a profit by buying raw materials and transforming them into finished goods that can be sold.

Operating cycle for Manufacturers Begins with the purchase of raw materials and ends when cash is received from selling the finished goods inventory.

Net Income for Merchandisers and Manufacturers
First gross profit is determined by subtracting cost of goods sold from net sales. Then net income is determined by subtracting other expenses from gross profit.

Gross Profit (gross margin) Sales revenue minus cost of goods sold

Inventory cost the cost of any asset, including inventory, is the sum of all the costs incurred to bring the asset to its intended use, including delivery and installations costs, insurance and storage costs, sales and excise taxes, and subtracting any discounts or allowances.

Three types of Inventory Costs (Managerial Accounting) 1) Direct materials are the materials used to make the product. 2) Direct labor is the cost of paying workers to make the product. 3) Manufacturing overhead includes all other costs incurred in the manufacturing process but that are not part of direct materials or direct labor.

Three Forms of Inventory 1) Raw materials used in making products 2) Work in Process—inventory that has been worked on but not yet completed. It is beyond the stage of raw materials. By definition it must include some direct labor and/or