Learning Objective

identify how expenses flow with the 3 inventory accounts and cost of items sold account.

Question: practice Furniture Company’s direct materials encompass items such as wood and also hardware. Direct labor requires the employees who build the tradition tables. Production overhead consists of items such as indirect products (glue, screws, nails, sandpaper, and also stain), indirect job (production supervisor), and also other manufacturing costs, such together factory devices maintenance and also factory utilities. What accounts are supplied to document the costs connected with this items, and where do these accounts show up in the gaue won statements?

 

Answer: all the expenses mentioned previously for custom Furniture space product prices (also dubbed manufacturing costs). Product expenses are tape-recorded as an legacy on the balance sheet until the assets are sold, in ~ which point the expenses are taped as an cost on the earnings statement. To document product costs as an asset, accountants use among three inventory accounts: raw materials inventory, work-in-process inventory, or finished products inventory. The account they use depends on the product’s level of completion. They use one price account—cost of goods sold—to document the product prices when the items are sold.

You are watching: Product costs appear on the balance sheet

Table 1.4 "Accounts used to document Product Costs" summarizes the accounts used to track product costs. Number 1.6 "Flow that Product costs through Balance Sheet and also Income explain Accounts" shows how product costs flow v the balance sheet and income statement. Lastly, keep in mind 1.57 "Business in activity 1.7" provides an instance of just how the accounts shown in Table 1.4 "Accounts supplied to record Product Costs" and also Figure 1.6 "Flow of Product costs through Balance Sheet and Income explain Accounts" appear in gaue won statements. Take it time to testimonial these items carefully. Your expertise of them will help clarify how product expenses flow through the accounts and where product costs appear in the financial statements. The following discussion provides further clarification.


Product prices on the Balance Sheet

Question: What is the difference in between raw products inventory, work-in-process inventory, and also finished items inventory?

 

Answer: each of these accounts is provided to record product expenses depending on whereby the product is in the manufacturing process, and also each account is an legacy account top top the balance sheet.


Raw Materials

The raw materials inventoryAn account used to document the expense of materials not yet put right into production. Account records the expense of products not yet put into production. For tradition Furniture Company, this account has items such together wood, brackets, screws, nails, glue, lacquer, and sandpaper.


Work in Process

The work-in-process (WIP) inventoryAn account used to record costs connected with commodities in the production procedure that space not yet complete. Account records the expenses of assets that have actually not however been completed. Suppose Custom Furniture firm has eight tables that space still in manufacturing at the end of the year. All production costs connected with this incomplete eight tables—direct materials, direct labor, and also manufacturing overhead—are contained in the WIP perform account.

Once goods in WIP inventory room completed, they are transferred into finished products inventory. The cost of completed items that space transferred out of WIP inventory right into finished products inventory is referred to as the expense of goods manufacturedThe cost of completed items transferred indigenous work-in-process inventory right into finished products inventory..


Finished Goods

The finished items inventoryAn account supplied to document the manufacturing costs associated with assets that space completed and also ready come sell. Account records the manufacturing expenses of assets that room completed and ready come sell. Suppose Custom Furniture company has five completed tables in ~ the end of the year (in enhancement to the eight partially completed tables in work-in-process inventory). The manufacturing expenses of these five tables—direct materials, direct labor, and also manufacturing overhead—are had in the finished items inventory account until the tables are sold. (For the objectives of this example, i think the tables space “sold” when yielded to the customer.)


Product costs on the income Statement

Question: The costs of materials not however put right into production are contained in raw products inventory. The costs linked with products that are not yet complete are contained in WIP inventory. And also the costs associated with products that are completed and also ready to offer are had in finished items inventory. What happens to the product costs in finished items inventory when the commodities are sold?

 

Answer: when completed goods are sold, their expenses are transferred out the finished items inventory into the cost of items soldAn expense account on the income statement that represents the product expenses for all goods sold throughout the period. Account. Expense of items sold is an expense account ~ above the income statement the represents the product expenses of all items sold during the period.

For example, suppose Custom Furniture firm sells one table that expense $3,000 to develop (i.e., direct materials, direct labor, and also manufacturing overhead costs incurred to produce the table full $3,000). The $3,000 expense is in finished products inventory until the entrance is do to document the sale, at which time finished products inventory is reduced by $3,000 (the table is no longer in inventory) and also cost of goods sold is enhanced by $3,000.


Table 1.4 Accounts used to record Product Costs

Account Name summary Financial statement
Raw materials inventory Cost the unused manufacturing materials Balance paper (asset)
Work-in-process inventory Cost of incomplete products Balance paper (asset)
Finished items inventory Cost the completed commodities not however sold Balance sheet (asset)
Cost of products sold Cost of commodities sold Income explain (expense)

Figure 1.6 circulation of Product costs through Balance Sheet and also Income explain Accounts

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Business in action 1.7


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Source: picture courtesy that Matthew Rutledge, http://www.flickr.com/photos/rutlo/4252743250//.


Presentation the Product prices at Advanced Micro Devices

Advanced Micro tools (AMD), a producer the microprocessors and flash memory devices for an individual and networked computers, has yearly revenues the $6,500,000,000. A summarized version of AMD’s balance sheet shows up as complies with (all amounts are in millions). Notification that 3 inventory accounts, totaling $632,000,000, support the complete inventory quantity that appears in the asset ar of the balance sheet. The raw products inventory account ($28,000,000) is supplied to document the price of materials not yet put right into production. The work-in-process perform account ($441,000,000) is offered to document costs associated with microprocessors and flash memory devices in the production procedure that room not yet complete. The finished products inventory account ($163,000,000) is provided to document the product costs associated with AMD’s assets that space completed and ready to sell.


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When AMD sells finished goods, the price of these items is transferred out that finished products inventory right into the expense of goods sold account, i beg your pardon this agency calls cost that sales, as numerous companies do. The operating part of AMD’s revenue statement follows—again, all quantities are in millions. Notice that cost of sales shows up below network sales and over all other operating expenses.


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Key Takeaway

The raw materials inventory account is offered to record the expense of materials not however put into production. The work-in-process list account is supplied to record the expense of products that are in production however that are not yet complete. The finished items inventory account is used to document the expenses of products that room complete and ready to sell. These three inventory accounts room assets account that show up on the balance sheet. The expenses of completed products that are sold are videotaped in the cost of items sold account. This account appears on the earnings statement as an expense.

Review trouble 1.7

Match each of the complying with accounts with the appropriate description the follows.

_____ Raw products inventory _____ Work-in-process inventory _____ Finished products inventory _____ price of items sold offered to record product expenses of goods that are completed and also ready to sell used to document product costs of products that have actually been sold supplied to document product costs of products that are still in production offered to record the cost of products not yet put into production

Solutions to Review difficulty 1.7


Raw materials inventory 4. Offered to record expense of products not however put right into production.
Work-in-process inventory 3. Used to document product costs linked with incomplete products in the production process.
Finished goods inventory 1. Used to document product costs associated with products that are completed and ready come sell.

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Cost of goods sold 2. Provided to record product costs connected with products that are sold.