Question

Shown here are annual financial data at December 31, 2017, taken from two different companies.

	Music world retail	Wave-board manufacturing
Beginning inventory:
Merchandise	\(200,000
Finished goods		\)500,000
Cost of purchases	300,000
Cost of goods manufactured		875,000
Ending inventory:
Merchandise	175,000
Finished goods		225,000

Required

1. Compute the cost of goods sold section of the income statement at December 31, 2017, for each company. Include the proper title and format in the solution.

2. Write a half-page memorandum to your instructor (a) identifying the inventory accounts and (b) describing where each is reported on the income statement and balance sheet for both companies.

Short answer

1. Cost of goods sold:

Music world retail: $325,000.

Wave-board manufacturing:$1,150,000.

2. Memorandum:

Date: XX/XX/XXXX

To: Instructor

From: Accountant

Subject: Reporting ending inventory and cost of goods sold

The business entity will report the ending inventory account on the balance sheet. It includes ending inventory of merchandise and ending inventory of finished goods.

The income statement of both the business entities will report the cost of goods sold calculated in step 1.

Step-by-step solution

Definition of Current Assets

The resources that the business entity handles for maintaining liquidity as they will generate cash inflow within the operation period are known as current assets. It includes assets such as inventory and receivables.

Cost of goods sold section

Particular	Music world retail
Beginning inventory of merchandise	$200,000
Add: Cost of purchases	300,000
Ending inventory of Merchandise	(175,000)
Cost of goods sold	$325,000

Particular	Wave-board manufacturing
Beginning inventory of finished goods	$500,000
Add: Cost of goods manufactured	875,000
Ending inventory of finished goods	(225,000)
Cost of goods sold	$1,150,000

Identification and reporting of inventory accounts

Balance sheet of Music world retail
Current assets:
Ending inventory of merchandise	$175,000

Balance sheet of Wave board manufacturing
Current assets:
Ending inventory of finished goods	$225,000

Income statement of Music world retail
Sales
Less: Cost of goods sold	($325,000)
Gross profit

Income statement of Wave board manufacturing
Sales
Less: Cost of goods sold	($1,150,000)
Gross profit