Chapter 14, Problem 1MYW

A friend of yours recently opened Abracadabra, a sportswear shop specializing in monogrammed athletic gear. Most merchandise is special ordered for customers. However, a small inventory is on hand. Your friend does not understand why a physical inventory is necessary before preparing the financial statements. She knows how much she paid for all merchandise purchased. Why not simply use this amount for cost of goods sold? After all, it has been paid for. Write a brief memo explaining the purpose of the physical inventory and why she should not use the cost of purchases as cost of goods sold.