Question

Which of the following describes the flow of product costs in a manufacturing company?

1) Product costs are first accumulated in an asset account (Inventory) and then transferred to an expense account (Cost of Goods Sold) when the products are sold.
2) Product cost are first accumulated in an expense account (Cost of Goods Sold) and then transferred to an asset account (Inventory) When the goods are sold.
3) Product costs are recorded in an expense account (Cost of Goods Sold) as the goods are being manufactured.
4) Product costs are never expensed.

Answer 1

Product costs in a manufacturing company are initially recorded as an asset in Inventory and moved to an expense in Cost of Goods Sold when the products are sold.

Step-by-step explanation:

The flow of product costs in a manufacturing company is described by the first option: Product costs are first accumulated in an asset account (Inventory) and then transferred to an expense account (Cost of Goods Sold) when the products are sold. This reflects the general accounting principle of cost recognition in relation to revenue.

In accounting, costs incurred to produce goods are initially captured as an increase in inventory, an asset on the balance sheet. Once the goods are sold, these costs are then moved to the income statement under the Cost of Goods Sold, which matches the costs with the associated revenue from the sales of those goods. It is essential for businesses to track these costs accurately to report the correct financial health of the company.