Sunday, July 12, 2009

cost classifications of financial statements

The financial statements prepared by a manufacturing company are more complex than the statement prepared by a merchandising company because a manufacturing company must produce its goods as well as market them. The production process involves many costs that do not exist in a merchandising company, and somehow these costs must be accounted for on the manufacturing company's financial statement. In the section, we focus our attention on how this accounting is carried out in the balance sheet .
The balance sheet
The balance sheet or statement of financial position, of a manufacturing company is similar to that of a merchandising company. However, the inventory accounts differ between the two types of companies. A merchandising company has only class of inventory- goods purchased from suppliers that are a waiting resale to customers. In contrast, manufacturing companies have three classes of inventories- raw materials, work in process, and finished goods. Raw materials, as we have noted, are the materials that are used to make a product. Work in process consists of units of product that are only partially complete and will require further work before they are ready for sale to a customer. Finished goods consist of units of product that have been completed but have not yet been sold to customers. The overall inventory figure is usually broken down into these three classes of inventories in a footnote to the financial statements

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