How Do Product Costs Affect the Financial Statements?

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Cost accountants spend most of each workday calculating and analyzing product costs. They consider the material, labor and overhead costs along with the impact each makes on the total product cost. Cost accountants record all financial transactions involving inventory and product costs. These costs appear on the financial statements. The product costs determined by the cost accountant impacts the financial statements in several ways.

Ending Inventory

The primary reporting of product costs comes with the ending inventory valuation. Ending inventory consists of all products remaining in the company’s ownership at the end of the period. These products may be located at the company’s warehouse, on the production line or at a vendor facility. The cost accountant determines the product cost of each item, including raw materials and finished goods. The ending inventory valuation arises from multiplying each item by its unit cost and adding the totaling the costs.

Balance Sheet

The ending inventory appears on the balance sheet. The company classifies ending inventory as a current asset. A current asset refers to an asset that the company will use or convert to cash within one year. Typically, a company expects to sell inventory within a year and receive payment in cash. As a current asset, the ending inventory value impacts financial ratios, such as working capital or the current ratio. As an asset, the ending inventory value increases the total assets reported. These assets normally correspond to an increase in liabilities that the company uses to finance the inventory purchases.

Cost Of Goods Sold

Computing the value of cost of goods sold also relies on the product costs determined by the cost accountant. Cost of goods sold refers to the value of all items sold to customers during the period. The cost accountant reviews each product sale that occurred and the product costs associated with those specific products. She extends each product sold by the cost and adds them together to calculate a total cost of goods sold. Cost of goods sold represents an expense to the company.

Income Statement

The income statement reports all revenues and expenses incurred during the period. Revenues minus the expenses equal net income. As an expense, the cost of goods sold appears on this statement and reduces the net income reported for the period.

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