Acct 3511 Chapter 8 Concepts – Inventory & Cost of Goods Sold Professor Marco J. Malandra, CPA

1. State 4 characteristics of Inventory & Cost of Goods Sold (CGS)?
Is Inventory initially capitalized or expensed? What concept determines when it’s expensed?

Inventory: 1) Asset (current) 2) Balance Sheet 3) real 4) debit NAB
CGS: 1) Expense 2) Income Statement 3) nominal 4) debit NAB
Matching: Any expenses associated with revenue are recorded in the same period as the revenue. Inventory is not expensed until period sold, when Sales revenue is also recorded.

2. What is a Merchandiser and how do their FS’s differ from a Manufacturer or a Service Co?

Retail & Wholesale: Buy Inventory or Merchandise, appears on BS until sold, then IS CGS. Manufacturer: Makes inventory appearing on BS or Notes in 3 stages, until sold, then IS CGS. 1) Raw Materials: Major resources to be used in manufacturing products. 2) Work-in-Process: Costs of materials, labor & overhead needed to make products. 3) Finished Goods: Completed WIP costs, ready to be sold.
Service Co: No Inventory or CGS accounts (of course, many companies are hybrids, > 1 type).

3. Know the CGS Formula used to determine CGS on the IS:

+ Beginning Inventory (BI: Costs of inventory not sold from last period’s BS)
+ Purchases (All costs to buy including Transportation-in, less any Purchase Discount accounts)
= Cost of Goods available for Sale (CGAS: Total cost that can be sold, split between EI & CGS)
– Ending Inventory (EI: Year-end physical count * unit costs based on system & method used)
= Cost of Goods Sold (CGS: Cost of inventory sold this period, switch BS asset to 1st IS expense)

4. What is a common way that a Co. overstates NI (“cooks the books”) & what are FS