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Guide Accounting For Dummies_5

Tham khảo tài liệu 'guide accounting for dummies_5', tài chính - ngân hàng, kế toán - kiểm toán phục vụ nhu cầu học tập, nghiên cứu và làm việc hiệu quả | 148 Part II Figuring Out Financial Statements Calculating Cost of Goods Sold and Cost of Inventory One main accounting decision that must be made by companies that sell products is which method to use for recording the cost of goods sold expense which is the sum of the costs of the products sold to customers during the period. You deduct cost of goods sold from sales revenue to determine gross margin the first profit line on the income statement refer to Figure 7-1 . Cost of goods sold is a very important figure because if gross margin is wrong bottom-line profit net income is wrong. A business acquires products either by buying them retailers and distributors or by producing them manufacturers . Chapter 11 explains how manufacturers determine product cost for retailers product cost is simply purchase cost. Well it s not entirely this simple but you get the point. Product cost is entered in the inventory asset account and is held there until the products are sold. When a product is sold but not before the product cost is taken out of inventory and recorded in the cost of goods sold expense account. You must be absolutely clear on this point. Suppose that you clear 700 from your salary for the week and deposit this amount in your checking account. The money stays in your bank account and is an asset until you spend it. You don t have an expense until you write a check. Likewise not until the business sells products does it have a cost of goods sold expense. When you write a check you know how much it s for you have no doubt about the amount of the expense. But when a business withdraws products from its inventory and records cost of goods sold expense the expense amount is in some doubt. The amount of expense depends on which accounting method the business selects. A business can choose between two opposite methods to record its cost of goods sold and the cost balance that remains in its inventory asset account 1 The first-in first-out FIFO cost sequence 1 The .