Why Does Inventory Get Reported on Some Income Statements?

Inventory is an asset and its ending balance should be reported as a current asset on 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. (Cost of Goods Sold is considered to be an expense and is subtracted from Sales on a merchandising company’s income statement.) Some income statements will show the calculation of Cost of Goods Sold as Beginning Inventory + Net Purchases = Goods Available - Ending Inventory. In that situation the beginning and ending inventory does appear on the income statement.

The introductory course in accounting will often use the formula mentioned in calculating the Cost of Goods Sold: Beginning inventory + Net Purchases = Cost of Goods Available - Ending Inventory = Cost of Goods Sold. However, it is my experience that financial statements prepared with accounting software often find that calculation to be awkward, and instead show the following: Net Purchases + or - the change in Inventory = Cost of Goods Sold. The concept is that if ending inventory has increased, some of the cost of the Net Purchases should be added to Inventory and should not be charged against the current period Sales. The result is that the Net Purchases amount on the income statement is reduced and the amount of the reduction is added to the Inventory cost reported on the balance sheet. If the ending Inventory is smaller than the beginning Inventory amount, then the cost in Inventory should be reduced and added to the cost of the Net Purchases to report the correct amount as Cost of Goods Sold on the income statement.

I suspect that the authors of beginning accounting texts believe it is instructional to list the beginning inventory and ending inventory amounts in the Cost of Goods Sold section of the income statement. Perhaps they believe that the Cost of Goods Available is an important concept. As a result, they show the beginning amount of Inventory and the ending amount of Inventory on the Income Statement. I believe that this is awkward for accounting software. (Here are some reasons: The ending balance of last year’s Inventory will have to appear in the year-to-date column of the income statement, while the Inventory’s ending balance from the previous month must be reported in the current month column. The current month’s ending balance in Inventory must appear in both columns.)

To recap, Inventory is a current asset and should be reported on the balance sheet. The change in Inventory has an effect on the Cost of Goods Sold appearing on the income statement. It’s probably easiest to report only the change in Inventory in the
Cost of Goods Sold section of the income statement.

Learn more about Inventory & Cost of Goods Sold.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.