Cost of Goods Essay

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Cost of Goods XXXXXXXXX XACC 290 January 31, 2014 XXXXXXXXX Cost of Goods A merchandising company measures its income by through a multi-step income statement. The multi-step income statement highlights the gross profit and income from operating expenses to show the net income. The gross profit is determined by deducting the cost of goods sold from the sales revenue. The cost of goods sold is the total expense of the product that was sold. This can be calculated through a perpetual inventory system or a periodic inventory system. The perpetual inventory system computes a more detailed record of inventory on hand. This system can calculate the cost of goods sold at the time the product is sold. The periodic inventory system calculates the cost of goods sold at the end of an accounting cycle. The items that make up the cost of goods sold through either system consist of the inventory purchased, purchase returns, sale of merchandise, and sale returns. The inventory that is purchased is recorded by debiting inventory and crediting either cash or accounts payable depending on how the inventory was paid. If the inventory was returned to supplier, the journal entry debits accounts payable or cash and credits inventory. Then when the inventory is sold to customers, there are two journal entries created. One entry to record the sale by debiting accounts receivable and crediting sales revenue. The second entry to record the cost of goods sold by debiting cost of goods sold and crediting inventory (Kimmel, Weygandt, & Kieso , 2011). Reference Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Financial accounting: Tools for business decision making (6th ed.). Hoboken, NJ: John Wiley &

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