Q. What is Cost of goods sold?

The second major division of an income statement for a merchandising business is cost of goods sold. Cost of goods sold is denotes to cost to the seller of the goods sold to customers. For a merchandising company the cost of goods sold is able to be relatively large. All merchandising companies have a extent of goods on hand called merchandise inventory to sell to customers. Merchandise inventory or inventory is the quantity of goods available for sale at any given time. Cost of goods sold is resolute by computing the cost of (a) the beginning inventory (b) the net cost of goods purchased and (c) the ending inventory.

Observe the cost of goods sold section of Hanlon Retail Food Store's income statement in Exhibit 36. The merchandise record on 2010 January 1 was USD 24000. The net cost of buy for the year was USD 166000. Therefore Hanlon had USD 190000 of merchandise available for sale during 2010. On 2010 December 31 the merchandise inventory was USD 31000 significance that this amount was left unsold. deducting the unsold inventory the ending inventory USD 31000 from the amount Hanlon had available for sale during the year USD 190000 gives the cost of goods sold for the year of USD 159000. Understanding this relationship exposed on Hanlon Retail Food Store's partial income statement gives you the necessary background to determine the cost of goods sold as presented in this segment.

To decide the cost of goods sold accountants should have accurate merchandise inventory figures. Accountants use two essential methods for determining the amount of merchandise inventory- periodic inventory procedure and perpetual inventory procedure. We mention perpetual inventory procedure only in brief here. In the next section we emphasize perpetual inventory procedure and further evaluate it with periodic inventory procedure.