How to Read a Financial Report, 10th Edition

8COSTS OF SALES REVENUE, INVENTORY, AND ACCOUNTS PAYABLE

This chapter explores the connections between three accounts that are highly associated with one another: inventory (a current asset in the balance sheet), costs of sales revenue expense (an expense in the income statement), and accounts payable (a current liability in the balance sheet). Looking at it slightly differently, here’s a summary of how these connections generally function in a business:

• Inventory and accounts payable: In our business example, various technology products (i.e., inventory) are acquired for resale from different suppliers. When the inventory is acquired, QW Example Tech, Inc. is provided credit from the suppliers (before payment is due) that range from 30 to 60 days from the date the products are received. In this situation, the inventory asset and the accounts payable liability, both balance sheet accounts, would increase.
• Inventory and costs of sales revenue expense: When the products (i.e., inventory) are then resold to our QW Example Tech, Inc.’s customers, the direct connection is that the inventory asset balance would decrease (as products are shipped/delivered to customers), and the costs of sales revenue expense account in the income statement would increase.

Here, I would like to note that, for the purposes of our presentation, I provide an expanded version of costs of sales revenue, which allocates the total expense between expenses incurred as a result of selling services and expenses ...