Q5-12RQ - Horngren'S Financial And Managerial Accounting

Question

How is the net cost of inventory calculated?

Step-by-Step Solution

Answer

The net cost of inventory includes the beginning inventory, the purchases made during the year, and the closing inventory. 

Meaning of Inventory

The term “inventory” refers to the goods or products stocked by a business entity with an intent to resell them and generate revenues for running the business activities. 

Computation of net cost of inventory

The net cost of inventory is computed as follows:

$\text{Net cost of inventory}=\text{Beginning inventory}+\text{Inventory purchases}-\text{Closing inventory}$

The purchases should be net, i.e., purchase returns must be subtracted from the purchase account balance.