Inventory and the Cost of Goods Sold

This lesson discusses the accounting treatment of inventory: how to value inventory on the balance sheet, inventory as an expense (the cost of goods sold), and different methods of determining the cost of goods sold. It does not cover the lower-of-cost-or-market rule, which is dealt with in a separate lesson.

Learning Outcomes

On completion of the lesson, the student will be able to:

1. Define the terms inventory, sales revenue, and cost of goods sold.
2. Provide the formula for calculating cost of goods sold.
3. Explain how to value inventory on the balance sheet.
4. Demonstrate how to calculate the cost of goods sold.
5. State the two methods available to account for the cost of goods sold.
6. Discuss the four possible methods to determine how much of the cost is ending inventory and how much is the cost of goods sold.
7. List the three methods of categorizing inventory for manufacturing companies.