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Question 2Q

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Intermediate Accounting (Kieso)
Found in: Page 421

Short Answer

Why should inventories be included in (a) a statement of financial position and (b) the computation of net income?

Inventories are the main trading commodity. So it must be accounted for both making sales and keeping in hand.

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Step by Step Solution

Inventories in the financial statement

A financial statement summarizes all resources used by the business and the sources of capital to fund those resources. In other words, all assets and liabilities are listed in the financial statement.

As the inventory (finished or unfinished) is also a resource for a business, it is reported under the current asset section. In the current asset section, only those inventories are reported that the company control at that particular time.

Inventories in the computation of net income

Inventories are held for sale. So the sold inventories have some cost that must be recovered from the selling price of the goods.

Thus, to get the net income from sales, it is necessary to deduct the inventory cost or cost of goods sold from the sales revenue.

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