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Hi Mike,
I need help in understanding the basics of matching concept.
suppose we bough goods worth 10,000 in 2013 and sold in 2014 for the same price, how do we treat it in financial statements in 2013 and 2014?
In 2013 do we treat it like purchase of an asset i.e. increase the inventory and reduce the cash in SOFP.
And in 2014, we treat it like depreciation of an asset i.e. show the purchase in the income statement as expense and reduce it from the inventory in the SOFP?or is it that in 2013 there won’t be any treatment on it in our statements and we will record it as purchase only in 2014?
Whooooaaaa! AAmir!
This is F3 stuff! Maybe you need to watch John’s F3 lectures (I recommend that you do!)
In 2013 we will show the $10,000 within the Purchases line and it is an addition within the cost of sales calculation
But, because we haven’t sold any of these goods, we will include $10,000 within the closing inventory amount that is deducted in arriving at cost of sales
So there’s no affect on cost of sales this year but the net effect of the transaction is that our cash has gone down by $10,000 (or our liabilities (payables) have increased by that amount) and there is an amount of $10,000 included within closing inventory on the statement of financial position
In 2014 we sell the goods (let’s sell them for $12,000)
So revenue goes up by $12,000 and so does cash (or receivables)
What was the cost of those sales? $10,000
They WERE in closing inventory last year and therefore included within the top line of the cost of sales calculation as an addition
This year they are NOT in closing inventory so there’s no amount included within closing inventory as a deduction
So, in 2014, we have revenue that includes the sale for $12,000 and the cost of sales includes the $10,000
OK?
Watch John’s lectures!
Thanks Mike. I ceertainly shall watch John’s lecture once again to brush up my basics.
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