Some retailers view the goods purchased as part of the expense known as the cost of goods sold. Other retailers view the goods purchased as part of the asset inventory.

To appreciate both views, let's assume that a retailer begins the year with inventory having a cost of $800. It ends the year with inventory having a cost of $900. During the year the retailer purchased goods having a cost of $7,000. Let's also assume that the cost per unit did not change during the year.

Retailer X may view the $7,000 of purchases as an expense (cost of goods sold) except for $100, which was the cost of the goods added to its inventory ($900 vs. $800). Retailer X's income statement reports its cost of goods sold as: purchases of $7,000 minus the $100 increase in inventory = $6,900.

Retailer Y may view the $7,000 of purchases as an increase to its asset inventory and will report its cost of goods sold as: beginning inventory of $800 + purchases of $7,000 = cost of goods available of $7,800 minus the ending inventory of $900 = $6,900.

Regardless of whether the goods purchased are initially recorded in an inventory account or in a cost of goods sold account, the amounts reported on the financial statements must be the same: the expense (reported as the cost of goods sold on the income statement for the year) is $6,900 and the asset inventory (reported on the balance sheet as of the end of the year) is $900.

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