What is the effect of inventory valuation on financial statements?
Practice Questions
1 question
Q1
What is the effect of inventory valuation on financial statements?
It affects only the balance sheet
It affects only the income statement
It affects both the balance sheet and income statement
It has no effect on financial statements
Inventory valuation impacts both the balance sheet (as it determines the value of current assets) and the income statement (as it affects the cost of goods sold and net income).
Questions & Step-by-step Solutions
1 item
Q
Q: What is the effect of inventory valuation on financial statements?
Solution: Inventory valuation impacts both the balance sheet (as it determines the value of current assets) and the income statement (as it affects the cost of goods sold and net income).
Steps: 8
Step 1: Understand that inventory is the goods a company has for sale.
Step 2: Know that inventory valuation is how a company determines the value of its inventory.
Step 3: Realize that the value of inventory affects the balance sheet, which shows what the company owns.
Step 4: Recognize that higher inventory value increases current assets on the balance sheet.
Step 5: Understand that inventory valuation also affects the income statement, which shows the company's profits.
Step 6: Learn that the cost of goods sold (COGS) is calculated based on inventory valuation.
Step 7: Know that if COGS is higher, net income will be lower, and vice versa.
Step 8: Conclude that inventory valuation impacts both the balance sheet and the income statement.
