Q. 12SE - Horngren'S Financial And Managerial Accounting

Question

For the following accounts, indicate what causes the account to increase and decrease. The first account is completed as an example.

Account	Is increased by:	Is decreased by:
Raw material inventory	Material purchased	Material used
Work in process inventory
Finished goods inventory
Cost of goods sold

Step-by-Step Solution

Answer

Account	Is increased by:	Is decreased by:
Raw material inventory	Material purchased	Material used
Work in process inventory	Manufacturing cost	Cost of goods manufactured
Finished goods inventory	Cost of goods manufactured	Cost of goods sold
Cost of goods sold	Finished goods manufactured	Ending inventory

Step 1: Formula to calculate work in process

$\mathbf{Work}\mathbf{ }\mathbf{in}\mathbf{ }\mathbf{process}\mathbf{ }\mathbf{inventory}\mathbf{=}\mathbf{Beginning}\mathbf{ }\mathbf{WIP}\mathbf{+}\mathbf{Manufacturing}\mathbf{ }\mathbf{cost}\mathbf{-}\mathbf{Cost}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{goods}\mathbf{ }\mathbf{manufactured}$

The work in process is increased by manufacturing cost and decreased by the cost of goods manufactured.

Step 2: Formula to calculate finished goods inventory

$\mathbf{Finished}\mathbf{ }\mathbf{goods}\mathbf{ }\mathbf{inventory}\mathbf{=}\mathbf{Beginning}\mathbf{ }\mathbf{finished}\mathbf{ }\mathbf{goods}\mathbf{+}\mathbf{Cost}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{goods}\mathbf{ }\mathbf{manufactured}\mathbf{-}\mathbf{Cost}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{goods}\mathbf{ }\mathbf{sold}$

The finished goods inventory is increased by Cost of goods manufactures and decreased by the cost of goods sold.

Step 3: Formula to calculate Cost of goods sold

$\mathbf{Cost}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{goods}\mathbf{ }\mathbf{sold}\mathbf{=}\mathbf{Beginning}\mathbf{ }\mathbf{finished}\mathbf{ }\mathbf{goods}\mathbf{+}\mathbf{Finished}\mathbf{ }\mathbf{goods}\mathbf{ }\mathbf{manufactured}\mathbf{-}\mathbf{Ending}\mathbf{ }\mathbf{inventory}$

The cost of goods sold is increased by finished goods manufactured during the year and decreased by the ending inventory.