The cost of goods available for sale is allocated between
A beginning inventory and ending inventory.
B beginning inventory and cost of goods on hand.
C ending inventory and cost of goods sold.
D beginning inventory and cost of goods purchased.
The Correct Answer and Explanation is :
The correct answer is C: ending inventory and cost of goods sold.
Explanation:
The cost of goods available for sale (COGAS) is the total cost of inventory that is available to be sold during a specific period. This cost includes both the beginning inventory (the value of inventory carried over from the previous period) and the purchases made during the current period.
Once the COGAS is determined, it needs to be allocated between cost of goods sold (COGS) and ending inventory. Here’s how this works:
- Cost of Goods Sold (COGS): This refers to the cost of the inventory that has been sold during the period. It is calculated by subtracting the ending inventory from the cost of goods available for sale. The COGS is recognized on the income statement and represents an expense for the business.
- Ending Inventory: This is the value of inventory that remains unsold at the end of the period. It is reported on the balance sheet as an asset. The ending inventory is calculated through a physical count or a periodic inventory system. It also reflects the portion of COGAS that has not yet been sold.
The formula that explains the relationship is:
[
\text{COGAS} = \text{Beginning Inventory} + \text{Purchases}
]
[
\text{COGS} = \text{COGAS} – \text{Ending Inventory}
]
Thus, the cost of goods available for sale is split between ending inventory and the cost of goods sold. This allocation is essential for preparing accurate financial statements. The ending inventory will appear as an asset on the balance sheet, and the COGS will be reflected as an expense on the income statement.
In summary, the cost of goods available for sale is allocated between ending inventory and cost of goods sold (Answer C), which is the correct answer.