The Impact of Inventory on the Balance Sheet

PurchTips edition #455

The impact of Inventory on the Balance Sheet:
Be Aware!

There is so much to know about accounting that it would be easy to get carried away and not have the time or space to talk about the other inventory management topics that we need to cover. For those who want to learn all the details of inventory accounting and other aspects of finance that affect procurement, you could enroll in our course Finance for Strategic Procurement, Part I.

For this accounting discussion, there are two financial statements we will discuss:

  1. The Balance Sheet
  2. The Income Statement.

The balance sheet lists everything a company owns (assets), what it owes (liabilities), and the monetary difference between the two (equity). It represents a “snapshot” of a company’s finances at a specific moment in time. Inventory is considered an asset on a balance sheet and is included as a number representing its monetary value. See Table 1 for an example balance sheet.

Table 1: Balance Sheet – All numbers in thousands

Assets
Current Assets
Cash and Cash Equivalents 1,204,000
Net Receivables 1,144,000
Inventory 354,000
Other Current Assets 70,000

Total Current Assets

2,772,000

Long Term Investments 224,000
Property Plant and Equipment 2,162,000
Other Assets 56,000
Deferred Long Term Asset Charges 34,000

Total Assets

5,248,000

Liabilities
Current Liabilities
Accounts Payable 1,479,000
Short/Current Long-Term Debt 2,697,000
Other Current Liabilities 95,000

Total Current Liabilities

4,271,000

Long Term Debt 122,000
Other Liabilities 1,293,000
Deferred Long Term Liability Charges 185,000
Minority Interest 264,000

Total Liabilities

6,135,000

Common Stock 131,000
Retained Earnings (4,704,000)
Capital Surplus 3,407,000
Other Stockholder Equity 279,000

Total Stockholder Equity

(887,000)

Total Liabilities & Equity

5,248,000

The value of the inventory goes up when inventory is received and goes down when a sale takes place where the sale involves transferring ownership and possession of inventory. So, if a retailer-bought an iPad for $400, the inventory value would increase by $400. When the retailer sells that iPad for $499, the inventory value would decrease by $400 (that’s the amount paid by the retailer, not the amount the end customer pays the retailer). For the purposes of this course, you will just need to know that a similar accounting approach is used for raw materials, work-in-process, and finished goods inventory. However, the accounting process works a little differently for consumable inventory.

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