Question

Explain the way in which costs flow through the merchandise inventory account to a merchandiser's income statement.

Answer 1

• Cost of the merchandise inventory flows to merchandiser's income statement through "Cost of Goods sold"
• Under income statement there is a line item called cost of goods sold, which is calculated by following formula:

Cost of goods sold = Opening Inventory + Net Purchases - Ending Inventory

• Cost of goods sod is an expense, it denotes cost of the merchandise that was sold to customers. Ending inventory is deducted from Cost of goods sold hence it reduces the expenditure.