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CostofGoodSold

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Cost of Goods Sold

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Description

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The cost of goods sold section of the Income Statement calculates the

value of the merchandise that has been consumed (or that has

disappeared) for the month in question.

 

The Cost of Goods is generally not the total of the cost value of all

the items found on the sales report for the month, although under normal

circumstances, it should be close.

 

The Goods Available for Sale is the amount of merchandise you would

theoretically have at the end of the month if there had been no sales,

plus the freight charges for the month. In words, the Goods Available

for Sale is:

 

    (+) Opening Inventory            (previous months closing inv)

plus  (+) Cost of Goods Purchased      (purchases this month)

plus  (+) Freight of Incoming goods    (freight on purchases this month)

minus (-) Returns to Vendor This Period

minus (-) Vendor Discounts This Period (discounts actually taken this  

                                     month -- discounts marked as

                                     taken on a payment to a vendor)

equals (=) Goods Available for Sale

 

The Cost of Goods Sold is the difference between the Goods Available for

Sale and the Closing Merchandise. I.e., the value of the goods you would

have had were there no sales or other disappearances, and the actual

value of the remaining merchandise.

 

Purchases are calculated by adding up the invoices payable in the system

received (not paid for) in the current month which were assigned to

expense codes starting with the digit 5. In Version 8 and beyond, any

hand-checks expensed to 5-series codes are included in the purchases

totals. (Hand checks are those which were not specifically applied

against invoices-payable in the Jewelry Shopkeeper.)

 

Example. Started a month with $5000 worth of inventory. Purchase one

$700 necklace. Return one watch for $150. Sell one $300 ring. You would

expect to have a closing inventory of $5,250. In this example, the sales

report would show the sale of one item for a total cost value of $300,

which is very close to the Cost of Goods Sold Calculated on the income

statement. See the table below:

 

 

+========================================+

|Opening Inventory         |     5,000   |

|--------------------------+-------------|

|Purchases                 |       700   |

|--------------------------+-------------|

|Freight                   |        15   |

|--------------------------+-------------|

|Returns                   |       150   |

|--------------------------+-------------|

|Discounts                 |         0   |

|==========================+=============|

|Goods Available for Sale  |     5,565   |

|--------------------------+-------------|

|Closing Merchandise       |     5,250   |

|==========================+=============|

|Cost of Goods Sold        |       315   |

+==========================+=============+

 

 

If adjustments had been made to the inventory this month, and the

closing merchandise were 5,125, this would not affect the Goods

Available for Sale, but it would affect the Cost of Goods Sold:

 

+========================================+

|Opening Inventory         |     5,000   |

|--------------------------+-------------|

|Purchases                 |       700   |

|--------------------------+-------------|

|Freight                   |        15   |

|--------------------------+-------------|

|Returns                   |       150   |

|--------------------------+-------------|

|Discounts                 |         0   |

|==========================+=============|

|Goods Available for Sale  |     5,565   |

|--------------------------+-------------|

|Closing Merchandise       |     5,125   |

|==========================+=============|

|Cost of Goods Sold        |       440   |

+==========================+=============+

 

 

If somehow, the opening inventory were in the system with the wrong

number, such as $3,000, but the closing merchandise is correct, that

would affect the Goods Available for Sale and the Cost of Goods Sold:

 

+========================================+

|Opening Inventory         |     3,000   |

|--------------------------+-------------|

|Purchases                 |       700   |

|--------------------------+-------------|

|Freight                   |        15   |

|--------------------------+-------------|

|Returns                   |       150   |

|--------------------------+-------------|

|Discounts                 |         0   |

|==========================+=============|

|Goods Available for Sale  |     3,565   |

|--------------------------+-------------|

|Closing Merchandise       |     5,250   |

|==========================+=============|

|Cost of Goods Sold        |    -1,685   |

+==========================+=============+

 

 

If you added $1,100 more merchandise by adjusting inventory quantities

or by choosing Enter Existing Inventory, the closing merchandise would

be higher, but the income statement would not know how it got higher

because it didn't see the purchases in the invoices payable file. i.e.

the inventory level magically went higher so your cost of goods is

magically lower.

 

+========================================+

|Opening Inventory         |     5,000   |

|--------------------------+-------------|

|Purchases                 |       700   |

|--------------------------+-------------|

|Freight                   |        15   |

|--------------------------+-------------|

|Returns                   |       150   |

|--------------------------+-------------|

|Discounts                 |         0   |

|==========================+=============|

|Goods Available for Sale  |     5,565   |

|--------------------------+-------------|

|Closing Merchandise       |     6,250   |

|==========================+=============|

|Cost of Goods Sold        |      -685   |

+==========================+=============+