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Part: I Financial Statements and Stateme... > Valuing Inventories for the Balance ...

Chapter 3. Valuing Inventories for the Balance Sheet

Particularly for a line of business that manufactures or sells tangible goods, the size of the company's inventory exerts a powerful influence on its profitability. The inventory of goods is often the company's major current asset, and therefore contributes heavily to the calculation of the company's worth. Because the cost of goods sold is dependent on the valuation of the inventory, it also largely determines the company's gross profit (and, thus, its net income).

How you calculate the value of your company's inventory has a profound effect on the balance sheet: inventory is an asset and has an equally profound effect on the income statement (you combine the cost of goods sold with revenue to determine the gross profit).


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