Whenever a company buys inventory, their accountant has to record the results of these transactions in different ways. The following practice questions show how an increase in the cost of goods sold can impact a balance sheet.

Practice questions

Use the following information to answer the questions:

  • A company has depreciation expense of $1,200 and inventory purchases of $10,000. Its cost of goods sold is $7,000.

  • The company added $400 to its prepaid expenses during the year.

  • Accounts payable for inventory purchases increased $2,000.

  • The interest expense is $600, and selling and general expenses are $5,000.

  • Unpaid expenses at the end of the year included $1,500 of accrued expenses payable and $2,000 of accounts payable (unrelated to inventory).

  • The company paid $200 for interest during the year.

  1. What is the balance sheet impact to inventory as a result of the increase in cost of goods sold?

  2. What is the balance sheet impact to cash as a result of the increase in cost of goods sold?

Answers and explanations

  1. debit $3,000

    The company purchased $10,000 of inventory but recorded only $7,000 of costs of goods sold. This implies that the difference between the $10,000 purchased and the $7,000 sold, which is $3,000, still remains in inventory. Inventory is an asset account. Therefore, the remaining balance is a debit of $3,000 in inventory.

  2. credit $8,000

    The company purchased $10,000 of inventory; however, accounts payable increased only by $2,000. The difference between the purchases of $10,000 and the accounts payable increase of $2,000 is $8,000. It implies that $8,000 of purchases was paid with cash, causing a cash decrease (credit) of $8,000.

If you need more practice on this and other topics from your accounting course, visit Dummies.com to purchase Accounting For Dummies! Featuring the latest information on accounting methods and standards, the information in Accounting For Dummies is valuable for anyone studying or working in the fields of accounting or finance.

About This Article

This article is from the book:

About the book authors:

Kenneth Boyd is the owner of St. Louis Test Preparation (www.stltest.net). He provides online tutoring in accounting and finance. Kenneth has worked as a CPA, Auditor, Tax Preparer, and College Professor. He is the author of CPA Exam For Dummies. Kate Mooney has been teaching accounting to both undergraduates and MBA students at St. Cloud State University since 1986, after earning her PhD from Texas A & M University. She is a licensed CPA in Minnesota and is a member of the State Board of Accountancy.

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