Chapter 7. Inventory Valuation and Gross Margins


  • Average Cost

  • COGS and Gross Margin

If your company is a consultancy, or if you provide professional services, or if your use of tangible materials in the production of a product can be sensibly viewed as an expense, then you probably have little use for inventory analysis.

But if you're a retailer, wholesaler, or other type of merchandiser, or if you manufacture products, it's likely that most of your operating profit comes from selling goods for more than your acquisition costs. And in that case, the management and valuation of inventory is critically important to the health of your business.

On the balance sheet, it's likely that inventory represents the majority of a merchandiser's current assets. It can be tricky to weigh the need for inventory availability against the costs of acquiring and keeping it in stock.

On the income statement, the gross profit that a merchandising firm realizes during an accounting period is directly attributable to the difference between sales price and the cost of the goods sold (COGS). If you have a mistaken idea of how much the wireless printer you just sold cost you, you also have a mistaken idea of how much money the sale made you.

QuickBooks has tools that help you keep track of how much money you have invested in inventory, how many units you own, and how fast you turn them over. The tools that help you find out how profitable your company is, in conducting its merchandising or manufacturing ...

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