What is included in cost of ending merchandise inventory?
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What is Merchandise Inventory?Merchandise inventory is goods that have been acquired by a distributor, wholesaler, or retailer from suppliers, with the intent of selling the goods to third parties. This can be the single largest asset on the balance sheet of some types of businesses. If these goods are sold during an accounting period, then their cost is charged to the cost of goods sold, and appears as an expense in the income statement in the period when the sale occurred. If these goods are not sold during an accounting period, then their cost is recorded as a current asset, and appears in the balance sheet until such time as they are sold. If the market value of merchandise inventory declines below its recorded cost, then you must reduce the recorded cost down to its market value and charge the difference to expense, under the lower of cost or market rule. How to Track Merchandise InventoryMerchandise inventory may be located in three areas: in transit from suppliers (under FOB shipping point terms), in the company's storage facilities, or on consignment in locations owned by third parties. When compiling the total cost of inventory for recordation at month end in the company's accounting records, you need to include all of the merchandise in all three of these locations. Doing so is easiest with a perpetual inventory system, which maintains up-to-date balances of all unit quantities. A less reliable method is the periodic inventory system, under which a period-end physical count is needed to verify quantities on hand. What is Merchandise on Hand?Merchandise on hand is the cost of those goods currently available for sale. It does not include any inventory that is currently in transit to the retail location or which has been returned and has not yet been inspected to see if it can be resold. However, it does include all finished goods inventory. What is the Cost of Merchandise Sold?The cost of merchandise sold is the cost of goods that have been sold by a wholesaler or retailer. These entities do not manufacture their own goods, instead buying the goods from third parties and selling them to their customers. If wholesalers and retailers were to instead manufacture their own goods, this term would change to the cost of goods sold. The calculation of the cost of merchandise sold is to add the beginning inventory balance to merchandise purchases during the period, and subtract out the ending inventory balance. Thus, the calculation is: Beginning merchandise inventory + Merchandise purchases - Ending merchandise inventory There are several factors that can influence this cost. If there are purchase discounts, allowances, or freight costs, these items are added to the merchandise purchases amount. Introduction to Inventory and Cost of Goods SoldDid you know? To make the topic of Inventory and Cost of Goods Sold even easier to understand, we created a collection of premium materials called AccountingCoach PRO. Our PRO users get lifetime access to our inventory and cost of goods sold cheat sheet, flashcards, quick tests, business forms, and more. Inventory is a key current asset for retailers, distributors, and manufacturers. Inventory consists of goods (products, merchandise) awaiting to be sold to customers as well as a manufacturers' raw materials and work-in-process that will become finished goods. Inventory is recorded and reported on a company's balance sheet at its cost. When an inventory item is sold, the item's cost is removed from inventory and the cost is reported on the company's income statement as the cost of goods sold. Cost of goods sold is likely the largest expense reported on the income statement. When the cost of goods sold is subtracted from sales, the remainder is the company's gross profit. It is critical that the items in inventory get sold relatively quickly at a price larger than its cost. Without sales the company's cash remains in inventory and unavailable to pay the company's expenses such as wages, salaries, rent, advertising, etc. It is common for a company to experience rising costs for the goods it purchases. As a result, the company's costs may be different for the same products purchased during its accounting year. When this occurs, the company must decide which costs should be matched with its sales and which costs should remain in inventory. In the U.S., three of the cost flow methods for removing costs from inventory and reporting them as the cost of goods sold include:
In addition to selecting a cost flow method, the company selects one of the following inventory systems for recording amounts in its general ledger Inventory account(s):
It is time consuming and costly for companies to physically count the items in inventory, determine their unit costs, and calculate the total cost in inventory. There may also be times when it is necessary to determine the cost of inventory that was destroyed by fire or stolen. To meet these problems, accountants often use the gross profit method for estimating the cost of a company's ending inventory. We will illustrate the FIFO, LIFO, and weighted-average cost flows along with the period and perpetual inventory systems. This will be done with simple, easy-to-understand, instructive examples involving a hypothetical retailer Corner Bookstore. Inventory Is Reported at CostInventory items are recorded at their cost. Cost is defined as all costs necessary to get the goods in place and ready for sale. For instance, if a bookstore purchases a college textbook from a publisher for $80 and pays $5 to get the book delivered to its store, the bookstore will record the cost of $85 in its Inventory account. The recorded cost will not be increased even if the publisher announces that additional copies will cost $100. When the textbook is sold, the bookstore removes the cost of $85 from its inventory and reports the $85 as the cost of goods sold on the income statement that reports the sale of the textbook. The recorded cost for the goods remaining in inventory at the end of the accounting year are reported as a current asset on the company's balance sheet. Periodic vs Perpetual Inventory SystemsEach cost flow assumptions can be used in either of the following inventory systems:
Under the periodic inventory system:
Under the perpetual inventory system:
What is included in the cost of merchandise inventory?The cost of inventory includes the cost of purchased merchandise, less discounts that are taken, plus any duties and transportation costs paid by the purchaser.
What is included in the cost of ending inventory?What is included in ending inventory? The basic formula for calculating ending inventory is: Beginning inventory + net purchases – COGS = ending inventory. Your beginning inventory is the last period's ending inventory. The net purchases are the items you've bought and added to your inventory count.
What is not included in the cost of merchandise inventory?A cost that is not included in the account of merchandise inventory is the cost of damaged inventory which cannot be provided to the customers for sales.
What items should not be included in the cost of ending merchandise inventory?Answer and Explanation: The correct answer is option b) purchased units in transit, shipped FOB destination. The computation of ending inventory is computed using the following formula. Accordingly, the purchased units in transit, shipped FOB destination must not be included in the total cost of ending inventory.
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