Goods available for sale needs to be allocated between
3.3 Points
A inventory purchases and cost of goods sold.
B beginning inventory and ending inventory.
C ending inventory and cost of goods sold.
D beginning inventory and inventory purchases.
The Correct Answer and Explanation is :
The correct answer is C: Ending inventory and cost of goods sold.
Explanation:
In accounting, particularly in the context of inventory and cost of goods sold (COGS), businesses use the periodic inventory system or perpetual inventory system to track goods.
When goods are available for sale, they need to be allocated between ending inventory and cost of goods sold (COGS) to determine how much inventory remains unsold (ending inventory) and how much has been sold during the period (COGS). This allocation is crucial for determining the profitability of a business, as the COGS directly affects the gross profit.
Here’s how it works:
- Ending Inventory: This represents the value of the inventory that remains unsold at the end of the period. This is calculated by taking the beginning inventory, adding purchases made during the period, and then subtracting the COGS.
- Cost of Goods Sold (COGS): This refers to the cost of the inventory that has been sold during the period. It is calculated by taking the total cost of inventory available for sale (beginning inventory + purchases) and subtracting the ending inventory.
The formula for COGS is: COGS=Beginning Inventory+Purchases−Ending InventoryCOGS = \text{Beginning Inventory} + \text{Purchases} – \text{Ending Inventory}
By allocating the goods between ending inventory and cost of goods sold, companies can calculate their gross profit, which is essential for financial reporting and tax purposes. This allocation helps provide insights into how well a company is managing its inventory, pricing, and sales.
To sum up:
- Option A refers to an internal accounting division but doesn’t focus on the sales-related aspects.
- Option B involves the beginning and ending inventory but is not directly related to the goods available for sale.
- Option D pertains to the inventory purchases and beginning inventory, but again, it’s unrelated to the cost of goods sold.
Therefore, C is the correct choice as it directly deals with the proper allocation of goods available for sale to the ending inventory and cost of goods sold, which are essential to determining profitability.