A multi-step income statement for a trading business highlights the fact that between 40% and 60% of revenue from sales is accounted for as the cost of goods sold. The cost of goods attributed to a company’s products is expensed as the company sells these goods. There are several ways to calculate COGS but one of the more basic ways is to start with the beginning inventory for the period and add the total amount of purchases made during the period then deducting the ending inventory.
(According to Kimmel, Weygandt, and Kieso), cost of goods sold is found by taking the cost of goods available for sale (beginning merchandise inventory + net purchase), less the ending merchandise inventory (p. 244). In a wholesale or retail trading business, merchandise held for resale in the normal course of business is the largest asset owned by the organization. For this reason it is vital that accurate up-to-date records be maintained when goods are acquired and inventories taken. Finished goods and or merchandise makes up cost of goods sold.
There are two classifications of inventory: merchandiser or manufacturer. In a merchandiser company inventory consists of many items all different. Whereas, a manufacturer, some inventory may not be ready (Kimmel, Weygandt, & Kieso, p. 282). Examples of items that make up cost of goods include; produce, clothing, electronics, items that can be resold from manufacture to a company to the customer. This means when the business acquires a finished product, the cost of the product goes into an inventory asset account.
The customer will then purchase the product, finished good, the business transfers the cost of the product from the inventory asset account to the cost of goods sold expense account because the product is no longer in the business’s inventory (Kimmel, Weygandt, & Kieso, p. 282). References Kimmel, P. D. , Weygandt, J. J. , & Kieso, D. E. (2011). Financial accounting: Tools for business decision making (6th ed. ). Retrieved from The University of Phoenix eBook Collection database