Chapter 8
Inventory
What Is Inventory?
Inventory is an asset held for sale in the ordinary course of business, or that is in the process of being produced for sale, or the materials or supplies intended for consumption in the production process. This can include items purchased and held for resale. In the case of services, inventory can be the costs of a service for which related revenue has not yet been recognized.
What Is the Cost of Goods Sold?
Cost of goods sold is the accumulated total of all costs used to create a product or service, which has been sold. These costs fall into the general subcategories or direct labor, materials, and overhead. The cost of goods sold is calculated as:
Example
A company has $10,000 of inventory on hand at the beginning of the month, expends $25,000 on various inventory items during the month, and has $8,000 of inventory on hand at the end of the month. What was its cost of goods sold during the month? The answer is:
| Beginning inventory | $10,000 |
| + Purchases | 25,000 |
| – Ending inventory | 8,000 |
| = Cost of goods sold | $27,000 |
For Accounting Software
If you are using accounting software, it will calculate the cost of goods sold for you only if you are using a perpetual inventory system (see “What Is the Perpetual Inventory System?”). If you are using a periodic inventory system (see the next section), you have to manually calculate the cost ...
