The amount recognised on the statement of financial position as the cost of inventory will ultimately be recognised as:

Question

BlackTom AI · Accepted Answer

To tackle this question, let's first recall the flow of accounting for inventory and how costs move through the financial statements.
Option 1: cost of goods sold. This choice aligns with the fundamental accounting model where the cost attached to inventory becomes an expense (COGS) when the inventory is sold. The amount recognised on the balance sheet as inventory will, over time, be transferred to the income statement as COGS, reflecting the consumption of inventory in generating revenue.
Option 2: sales revenue. This is the amount earned from selling goods, not the cost incurred to acquire or produce them. Inventory costs are not recognised as revenue; revenue appears separately on the income statement when sales occur, but it does not represent the cost of the inventory.
Option 3: operating expenses. While some costs associated with running a business are classified as operating expenses, the direct cost of inventory that is sold is specifically classified as COGS rather than general operating expenses. If inventory is used to generate revenue, the cost typically flows into COGS first, not into operating expenses.
Option 4: administrative expenses. These are overhead costs related to the general administration of the business and are not the direct cost of inventory. The cost of inventory tied to goods sold does not get allocated to administrative expenses in the normal revenue-cost matching framework.
In summary, the core concept here is the matching principle: the cost of inventory is matched to the revenue from selling that inventory, which occurs through reporting it as cost of goods sold rather than as sales revenue or assorted operating/administrative expenses.

BACC012 Online Quiz- Week 6 | LA006

The amount recognised on the statement of financial position as the cost of inventory will ultimately be recognised as:

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