For product costs associated with a particular product to be reported on the income statement:

For product costs associated with a particular product to be reported on the income statement

For product costs associated with a particuler product to be reported on the income statement O The product must be sold. O The product may be in any of the manufacturers inventory acc The company must expect to sell the product during the next twelve months O The product must be transferred to Finished Goods Inventory O The product must still be in Work in Process Inventory

Answer

General guidance

Concepts and reason

Inventory: Manufacturing or a trading business involves selling of goods. Goods that are sold in the ordinary course of business are called as inventory. Inventory includes raw materials, work in process, and finished goods. Raw materials are used to produce finished goods. Work in process is unfinished inventory that requires some work to complete it to saleable condition. Finished goods are inventory that are ready to be sold.

Fundamentals

Matching principle: Matching principle requires recognition of expense when the related revenue is recognized. Cost of goods sold is an expense recognized when inventory is sold and sales revenue is recognized.

Step-by-step

Step 1 of 2

Product in any of the inventory accounts or expects to sell in next twelve months: Unsold inventory is an asset to the business. When product is in any of the inventory accounts then no expense to that extent is recognized for that product. Product costs are recognized only when goods are actually sold. Transfer of goods to finished goods inventory: Transfer of goods from work in process to finished goods reduces work in process balance and increases finished goods balance. It does not result in cost of goods sold expense.

Product in work in process account: Unsold inventory is an asset to the business. When product is in any of the inventory accounts then no expense to that extent is recognized for that product.

An expense is recognized only when goods are actually sold to outsiders in the ordinary course of business. Transfer of costs from work in process to finished goods, or from direct materials, labor and overhead accounts to work in process is not a sale and does not result in cost of goods sold expense.

Step 2 of 2

Sale revenue is recognized when finished goods are sold to outsiders. As per matching principle related cost of goods sold is recognized.

To report product costs on income statement the product must be sold.


Matching principle requires matching of expense with revenues. Sale of goods results in revenue and related cost of goods sold are recognized then as per matching principle. Until goods are sold inventory is reported as an asset in the balance sheet.

Answer

To report product costs on income statement the product must be sold.

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