Assume that Blossom Company uses a periodic inventory system and has these account balances:...

Question:

Assume that Blossom Company uses a periodic inventory system and has these account balances:

Purchases $350,000; Purchase Returns and Allowances $10,000; Purchase Discounts $6,000; and Freight-in $15,000.

Determine net purchases and cost of goods purchased.

Cost of goods:

Inventory is purchased for production or trading. All costs incurred to bring the inventory to the factory and to the stage of production/trading are known as the cost of goods purchased. Costs such as freight-in are part of the cost of goods purchased whereas the freight-out costs are selling expenses.

Answer and Explanation:


Computation of net purchases for the Blossom company:


Description Amount ($)
Purchases $350,000.00
Less: Purchase returns & allowances -$10,000.00
Less: Purchase discounts -$6,000.00
Net purchases $334,000.00


Computation of cost of goods purchased:


Description Amount ($)
Net purchases $334,000.00
Add: Freight-in $15,000.00
Cost of goods purchased $349,000.00


Under periodic inventory, all inventory inwards are recorded in the Purchases account. At the date of the physical inventory count, inventory cost is transferred to the cost of goods purchased and the cost of goods sold is calculated.

All costs incurred to bring the inventory to the stage of production/trading are included as the cost of goods purchased. Such as Freight-in costs.


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Cost of Goods: Definition & Calculation

from Financial Accounting: Help and Review

Chapter 3 / Lesson 13
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