Inventory and Cost of Goods Sold Assignment Help

Inventory refers to the assets:-

a) held for sale in the ordinary course of business;

b) in the process of production of such sale; or

c) In the form of materials or supplies to be consumed in the production process on in rendering of services.

Inventory represents one of the most important portion of business’s assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders/owners. Inventory is reported as a current asset on the company's balance sheet. It is a significant asset that needs to be monitored closely. Too much inventory can result in cash flow problems, additional expenses (e.g., storage, insurance), spoilage costs and losses if the items become obsolete. However, possessing too little inventory can result in lost sales, lost customers & loosing potential market share as well. Therefore, ideal inventory management is considered as one of the most essential objective for business.

Reasons for keeping inventory:

The basic reason to maintain inventory are as follows:-

a) Time - The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amounts of inventory to use in this lead time.

b) Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods.

c) Economies of scale - Ideal condition of "one unit at a time at a place where a user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory.

d) Appreciation in Value - In some situations, some stock gains the required value when it is kept for some time to allow it reach the desired standard for consumption, or for production. For example; beer in the brewing industry.

Inventory should be valued at the lower of cost or net releasable value. The cost of inventories should comprise all costs of purchase, cost of conversion & other costs incurred in bringing the inventories to their present location & condition.

In simple words, Cost of Goods Sold (COGS) refers to the direct cost attributable to production of the goods sold by a business. It reflects the cost of obtaining raw materials and producing finished goods that are sold to consumers. However, the definition may vary from business to business. For manufacturers, COGS is the cost of buying raw materials and manufacturing finished products. For retailers, it is the cost of obtaining or buying the product sold to customers. If the company is in service industry, COGS is the cost of the service it offers.

Cost of goods sold may be the same or different for accounting and tax purposes, depending on the rules of the particular jurisdiction. Certain expenses are included in COGS. Expenses that are included in COGS cannot be deducted again as a business expense. COGS expenses include:

a) The cost of products or raw materials, including freight or shipping charges;

b) The cost of storing products the business sells;

c) Direct labor costs for workers who produce the products; and

d) Factory overhead expenses.

COGS=Opening Inventory + Purchases + Direct Expenses - Closing Inventory

COGS can help companies work out how much they should charge for their products and services and the level of sales they need to sustain in order to make profit. It may highlight ways of improving efficiency & cutting expenditure. It is closely related to inventory, so it is essential information of a company’s Income Statement.