Crash Course in Accounting and Financial Statement Analysis, Second Edition

Inventories Are Linked to the COGS Line of the Income Statement

Recall that Cost of Goods Sold (COGS) refers to the direct cost of buying raw materials and converting them into finished products or services.

Before these costs become part of COGS (on the income statement) and are matched to the revenues they help generate (under the matching principle of accrual accounting), they are part of the company’s inventories (on the balance sheet), such that:

Beginning Inventory

+

Purchases of New Inventory = Ending Inventory

-

Cost of Goods Sold (COGS)

5. Inventories

Exercise Q1: Your firm sells office supplies: Beginning inventories = $500,000 COGS during period = $200,000 New inventories purchased = $300,000 Calculate ending inventory balance.

5. Inventories

Solution Q1: Your firm sells office supplies: Beginning inventories = $500,000 COGS during period = $200,000 New inventories purchased = $300,000 Calculate ending inventory balance: Beginning Inventory   $500,000 +   + Purchases of New Inventory = $300,000 -   - Cost of Goods Sold (COGS)   $200,000 = =   Ending Inventory   $600,000

Problem: Cost of office supplies changes: You bought a stapler for $2 that has been sitting in inventories; 6 months later you buy a stapler for your inventories for $2.50. What value do we assign to COGS (the stapler you have ...