When a company produces goods for sale, those goods must be:

• A. Immediately expensed as Cost of Goods Sold upon production.
• B. Recorded as revenue when production is completed.
• C. Recorded as inventory until they are sold, at which point they are expensed as Cost of Goods Sold.
• D. Excluded from the financial statements until they are sold.

Answer: (C)

Verified step by step guidance

1. Understand the concept of inventory: Inventory represents goods that a company has produced or purchased for resale but has not yet sold. It is classified as a current asset on the balance sheet.
2. Recognize the matching principle in accounting: Expenses should be recognized in the same period as the revenues they help generate. This means the cost of goods sold (COGS) is recorded only when the inventory is sold, not when it is produced.
3. Learn the accounting treatment for inventory: When goods are produced, their costs are recorded as inventory (an asset) on the balance sheet. This includes direct costs like materials and labor, as well as indirect costs like overhead.
4. Understand the transition from inventory to COGS: When the goods are sold, the inventory value is removed from the balance sheet and recorded as an expense under Cost of Goods Sold (COGS) on the income statement. This reflects the cost associated with generating the revenue from the sale.
5. Avoid common misconceptions: Goods are not immediately expensed as COGS upon production, nor are they recorded as revenue when production is completed. They are also not excluded from financial statements until sold. Instead, they are recorded as inventory until sold, adhering to proper accounting principles.