For many businesses, the primary source of revenue is from the sale of goods. In order for a business to earn a profit, its sales revenue must exceed all direct and indirect expenses for the period. For a merchandising business, as well as a manufacturing business, the cost of goods sold and the value of the inventory still on hand at the end of a period are significant items in the determination of both net income and financial position.
The term inventory refers to goods held for sale in the normal course of business. For a manufacturing enterprise, inventory refers to materials used in production, work in process, and finished goods.
Inventory represents one of the most active elements in the business operation since it is continuously acquired/produced and sold during a period. As such, a large part of the resources of a business is often invested in goods purchased or manufactured. The cost of these goods must be recorded, grouped and summarized during the accounting period. At the end of the accounting period, the inventory costs must be allocated between the cost of goods sold, and the cost of goods still on hand, i.e., ending inventory. This allocation is a major element in financial accounting, and the primary focus of Chapter 8. To learn more, click here.