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Hi,
my question is why the cost of sales should include inventories written off or written down?
As far as I understand the meaning of COGS is the cost of goods SOLD. But why should we include the amounts (written off or written down) into it that is not related to Sales?Here is the text from ACCA F3 book:
The costs of inventory written off or written down should not usually cause any problems when calculating the gross profit of a business, because the cost of goods sold will include the cost of inventories written off or written down, as the following example shows.
It really depends on the context of the question.
The strict presentation in the accounts is that the cost of goods sold should be the cost of the goods actually sold, and therefore in calculating the gross profit the inventory should be shown at cost. The write down or write off should then be shown as an expense in arriving at the net profit.
However, showing the inventory at its value in the SOFP (after write-offs and write-downs) will reduce the gross profit and it is then not necessary to show the amount of the write-down/write-off as a separate expense – the final profit would be exactly the same.
Again, it depends on what the question actually wants. The most likely relevant exam question is when you are asked to calculate the amount of any lost inventory and for that the presentation is irrelevant – you just need to calculate the figure. I show the best way of dealing with this in my free lectures on mark-ups and margins.
The lectures are a complete free course for Paper F3 and cover everything needed to be able to pass the exam well. If you are watching the lectures then you do not really need the Study Text. What is vital, whether or not you are watching the lectures or using the Study Text instead, is that you do have a Revision Kit. They contain lots of exam standard questions for practice, and practice on these questions is vital to passing the exam.
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