Question

8. Cost of goods sold A) is calculated exactly the same for merchandising and manufacturing companies. B) only appears on manufacturing companies' income statements. C) appears on both manufacturing and merchandising companies' income statements. D) only appears on merchandising companies' income statements.

Answer 1

Answer to Q#8 (First question in the list): Option-C: appears on both manufacturing and merchandising companies' income statements. Reason: Cost of goods sold refers to cost of inventory that were sold during normal course of the business. Manufacturing firms incurs manufacturing costs such as direct materials, direct labor and factory overhead costs to produce final products and then sell them for a price higher than total product costs. On the other hand, merchandising firm purchases finished goods from a seller and sells them to another buyer for a price higher than price paid to purchase those goods. For a manufacturing firm, formula to calculate cost of goods sold will be: Cost of goods sold = (Beginning WIP + Current production costs - Ending WIP) + Beginning finished goods - Ending finished goods; Here, Beginning WIP + Current production costs - Ending WIP = Cost of goods manufactured; WIP -->Work in process. For a merchandising firm, formula to calculate cost of goods sold will be: Cost of goods sold = Beginning finished goods + Current period's merchandise purchase cost - Ending finished goods; Here, finished goods --> merchandise inventory. Option-(A) is incorrect because calculation of cost of goods sold for manufacturing firm is different from merchandising firm as explained; Option-(B) & (D) are incorrect because cost of goods sold appears on both manufacturing and merchandise firm's income statements; Option-(C) is correct because cost of goods sold appears on both manufacturing and merchandise firm's income statements as explained.