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Accounting: cost of goods sold, inventory in e-business, components of inventory

1) What types of costs make up cost of goods sold?

2) How does your organization calculate cost of goods sold?

3) How significant is inventory to e-businesses?

4) What components make up the total inventory for a manufacturing company?

5) What are the differences between an income statement for a manufacturing and a merchandising company?

6) What is the significance of accounting for inventories?

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What types of costs make up cost of goods sold?

Cost of Goods Sold includes all expenses directly associated with the production of goods or services the company sells (such as material, labor, overhead, and depreciation). It does not include SG&A. Figure representing the cost of buying raw materials and producing finished goods. On an income statement, the cost of purchasing raw materials and manufacturing finished products. Equal to the beginning inventory plus the cost of goods purchased during some period minus the ending inventory. Also called cost of sales. Beginning inventory plus direct purchases, direct labor costs, and overhead costs less withdrawal for personal use and ending inventory. Sole proprietors compute their cost of goods sold in Part III of Schedule C. Cost of goods sold represents direct costs incurred by businesses from the process of selling goods. This item is calculated as purchases and materials + opening inventory - closing inventory. This item can have a negative value if closing inventory is larger than purchases and materials plus opening inventory. Cost of goods sold are not shown in this report but can be derived by subtracting gross margin data from annual sales data. They represent the total cost of merchandise sold for cash or credit at wholesale and retail by establishments primarily engaged in merchant wholesale trade. Cost of goods sold is calculated by adding all purchases of merchandise (net of returns, allowances, and discounts but including charges for freight, insurance, etc.) during the year to the beginning year inventories, then deducting the end-of-year inventories from the total. Firms were instructed to exclude the cost of containers, wrapping.

The cost of production or purchases of all the products and services that are sold in the reported period. It is calculated either by multiplying the cost of each product or service by the quantity sold or by calculating the opening inventory (stock) plus purchases during the period less the closing inventory. The amount that the retailer has paid for goods actually resold. It includes the invoice cost, discounts, rebates, and shrinkage and freight charges. Formula: opening stock (at cost) plus purchases (at cost) less closing stock (at cost). If your business involves selling an item or object, the cost of that item or the raw materials, equipment, labor and other costs to produce and deliver it are reported separately from "expenses" on your tax return. If you have this type of business, then you need to keep records of inventory as well.

The difference between "Cost of Goods Sold" and "Expenses" is, in general, those costs paid in order to produce and deliver your product versus things like overhead, office supplies, etc. In accounting, the cost of goods sold describes the direct expenses incurred in producing a particular good for sale, including the actual cost of materials that comprise the good and direct labor expense in putting the good in salable condition. Cost of goods sold does not include indirect expenses such as office expenses, accounting, shipping department, advertising, and other expenses that cannot be attributed to a particular item for sale.

How does your organization calculate cost of goods sold?

If your business makes or buys goods to sell and maintains an inventory, you're entitled to deduct the cost of goods sold from your revenues in computing your taxable income.

It's a given that all manufacturers, retailers, and wholesalers must use an inventory to accurately track their costs. Other types of businesses, such as those providing professional services or working in the trades, will need to use inventory accounting methods if they bill customers separately for materials and supplies. And under IRS rules, most businesses that use inventory must use the accrual system, at least for purchases and sales of inventory items.

In general terms, the formula used to compute your cost of goods sold is the following:
opening inventory
+ additions during the year
goods available for sale
- year-end inventory
cost of goods sold

If you are a sole proprietor filing Schedule C, this equation is the basis for Part III on the flipside of the Schedule C. Inventory at the beginning of the year is reported on Line 35, purchases are reported on Line 36 (with a reminder to subtract the cost of items you withdrew for your own personal use), goods available for sale appears on Line 40, inventory at the end of the year is reported on Line 41, and the result is your cost of goods sold on Line 42.

If you are a reseller of goods, these would be the only five items you need. But if you are a manufacturer, things get a little more complicated.

How significant is inventory to e-businesses?
In an e-business, as your additions and purchases during the year, an e-business would report the cost of raw materials or parts you purchased for manufacture into a finished product. You would also report the cost of labor on Line 37, ...

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