CHAPTER 6- Cost of Goods Sold and Inventory
CHAPTER OUTLINE
Nature of Inventory and cost of goods sold
Inventory represents products Held for resale and is classified as a current asset on the balance sheet. When companies sell their inventory to customers, the cost of the inventory becomes an expense called cost of goods sold.

Cost of goods sold, cost of sales, or cost of merchandise sold, represents the outflow of resources caused by the sale of inventory and is the most important expense on the income statement of companies that sell goods instead of services.

Sales Revenue
(Cost of Goods Sold)
Gross Margin

Gross margin indicates the extent to which the resources generated by sales can be used to pay operating expense (selling and administrative expenses) and provide for net income. Cost of inventory has a direct effect on cost of goods sold and gross margin.

Companies that sell inventory
Merchandisers - Companies that purchase inventory in a finished condition and hold it for resale without further processing. Inventory held by merchandisers is termed merchandise inventory which is an asset. When that asset is sold to a customer, it becomes an expense called cost of goods sold which appears on the income statement.
Manufacturers - Companies that buy and transform raw materials into a finished product which is then sold. Manufacturing companies classify inventory into three categories: raw materials, work-in-process, and finished goods.
This class will concentrate on Merchandising Businesses
Cost of Goods Sold Model The relationship between cost of goods sold and inventory is given by cost of goods sold model:

Beginning Inventory | + purchases | = Cost Of Goods Available For Sale “COGAFS” | -ending inventory | = Cost Of Goods Sold “COGS” |

Apply the Cost of Goods Sold Model
Bargain Shops, a retail clothing store,