What is the Inventory and COGS? from calculate current ratio of company Watch Video

⏲ Duration: 5:1
✓ Published: 26-Apr-2024

Description:
Inventory and Cost of Goods Sold (COGS) are closely related concepts in accounting, particularly in the context of manufacturing, retail, and other inventory-based businesses.<br/><br/>Inventory:<br/>Inventory refers to the goods that a company holds for the purpose of selling to customers in the ordinary course of business. It includes raw materials, work-in-progress (partially completed goods), and finished goods awaiting sale. Inventory is classified as a current asset on the balance sheet because it is expected to be converted into cash or sold within the normal operating cycle of the business.<br/>Cost of Goods Sold (COGS):<br/>COGS represents the direct costs associated with producing the goods that a company sells during a specific period. It includes the cost of materials used in production, direct labor costs, and overhead costs directly attributable to production activities. COGS is reported on the income statement and is deducted from revenue to calculate gross profit.<br/>The relationship between inventory and COGS is straightforward:<br/><br/>At the beginning of an accounting period, the company has a certain amount of inventory on hand from the previous period.<br/>During the period, the company purchases additional inventory, produces goods, and sells products to customers.<br/>The cost of the inventory sold during the period is recorded as COGS on the income statement. This amount is calculated based on the cost of the inventory that was on hand at the beginning of the period, plus any additional inventory purchases made during the period, minus the value of inventory remaining at the end of the period (ending inventory).<br/>Ending inventory is reported as a current asset on the balance sheet, representing the value of unsold goods at the end of the accounting period.<br/>In summary, inventory represents the goods a company holds for sale, while COGS represents the cost of those goods that have been sold during a specific period. Tracking inventory and accurately calculating COGS are critical for determining a company's profitability and managing its cash flow effectively.