when we talk about inventory we talk
about goods either ready to be sold or are in the process of transformation and
will be ready to be sold soon enough this is why inventory is the balance
sheet account which is most closely related to cost of goods sold the P&L
line indicating the cost of the products our company sells actually there is a
useful equation that helps us visualize the relationship even better cost of
goods sold is equal to the beginning inventory in a year plus the purchases
we have made throughout the year – inventory we have at the end of the
year this equation is even easier to understand if we transform it in this
way the inventory we have at the end of the year is equal to the inventory we
have at the beginning of the year plus the purchases we have made throughout
the year – cogs makes sense right it basically
tells us that at the end of the year our warehouse will contain the items that
were there at the beginning plus the ones we’ve added and haven’t sold yet
right at this point one can rightly ask are all costs the firm sustains
capitalized in inventory we kind of mentioned it before but let’s say it
even better here some of the costs will be sort of capitalized and included in
inventory when they are sustained these are the product costs expenses closely
related to the creation of our product the transformation necessary for it to
be considered a finished good period costs are expensed directly without
being capitalized in inventory they are directly registered when they are
incurred product costs comprise purchase costs less trade discounts and rebates
costs of personnel directly involved in the production process overhead expenses
tied to production for example rents and electricity of the production plant and
other costs necessary to bring the product to its present location and
condition here are a few examples of period costs expenses related to an
abnormal waste of material storage costs admin costs and selling expenses these
costs will be expensed in the same period when they are incurred and they
cannot be related to a particular batch of products we are selling crate this is
another important step we’ve made in our next lesson we’ll talk about the cost
flow methods see you there