An income statement shows the amount of income earned by a company in any given period -- usually by month, quarter or year -- minus costs and expenses. Subtracting costs and expenses from income will show the net profit or loss during the period covered in the statement. Income statements are frequently called operating statements or earnings reports. Inventory is not always found on an income statement.
While inventory is not always found on an income statement, it is always listed as a current asset on balance sheets. The reason inventory is important to an income statement is that inventory numbers are used in the computation of the cost incurred to produce the goods sold during the period.
Cost of Goods Sold
The cost of goods sold is an expense and will be subtracted from income on an income statement. Sometimes the presentation on the income statement will show a calculation using the equation Beginning Inventory + Purchases = Goods Available - Ending Inventory = Cost of Goods Sold. In that case both beginning and ending inventory figures will show up on the income statement.
Effect of Reducing Inventory
When inventory investment is reduced on an income statement, it results in lowering the cost of goods sold. In turn, the net income before taxes will increase by the same amount. For example, a $10 reduction in inventory will result in a $10 increase in net income. For every dollar in inventory reduction, there is a corresponding rise in net income by the same dollar amount.
People with excellent inventory management skills are an asset because reducing excess inventory creates more cash that can be used by the company for other purposes. Reducing inventory too much can result in poor customer relations as lack of availability will send a sale to competitors. A number of strategies applied to the supply chain can improve inventory problems.
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