Chapter 3

Inventory and Cost of Goods Sold

We continue our discussion of current assets and the related income statement effects. In this chapter we concentrate on inventory and its related expense—cost of goods sold. Inventory includes goods held out for sale or held for production in the ordinary course of business. For manufacturing and merchandising firms, inventory is frequently the largest current asset presented on the balance sheet and cost of goods sold the largest expense reported in the income statement. Merchandisers are merchants and simply buy and sell goods in their unaltered finished condition. Manufacturers acquire raw materials and subsequently incur “conversion” costs of labor and overhead in converting the materials into ...

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