Reporting of Inventory on Financial Statements
Inventory is an asset and its ending balance is reported in the current asset section of a company’s balance sheet. Inventory is not an income statement account.
However, the change in inventory is a component in the calculation of the Cost of Goods Sold, which is often presented on a company’s income statement.
An increase in inventory will be subtracted from a company’s purchases of goods, while a decrease in inventory will be added to a company’s purchase of goods to arrive at the cost of goods sold.
[Rather than simply showing the change in inventory as an adjustment to cost of goods, some income statements will show the calculation of Cost of Goods Sold as Beginning Inventory + Net Purchases = Goods Available – Ending Inventory.]
Example of Presenting the Cost of Goods Sold Calculation
Assume that a company’s beginning inventory was $100 and its ending inventory was $110, which is an increase of 10. Let’s assume that a company purchased $1,000 of goods during the accounting period. A common method of presenting the calculation of the cost of goods sold on the income statement is: Purchases of $1,000 minus the increase in inventory of $10 = $990. It is common for textbooks to show this calculation of the cost of goods sold on an income statement: Beginning Inventory of $100 + Purchases of $1,000 = Cost of Goods Available of $1,100 – Ending Inventory of $110 = $990. Hence, both presentations show the cost of goods sold of $990.
Recap
Again, inventory is a current asset that is reported on the balance sheet. The change in inventory is used to adjust the amount of purchases in order to report the cost of the goods that were actually sold. If some of the purchases were added to inventory, they are not part of the cost of goods sold.
