- It increases assets
- It decreases liabilities
- It affects inventory valuation
- It has no effect on the balance sheet
Out of the given options, COGS affects inventory valuation on the balance sheet.
Here’s why:
- COGS (Cost of Goods Sold) represents the direct cost of producing the goods that a company has sold during a specific period.
- The balance sheet shows a company’s financial position at a specific point in time, including its assets and liabilities.
- One of the assets listed on the balance sheet is inventory. This represents the cost of goods a company has purchased or manufactured but has not yet sold.
When COGS is calculated, it reduces the value of the inventory on the balance sheet. Here’s the logic:
- Imagine you buy raw materials for $100 to make a product. This increases your inventory value by $100 (an asset).
- When you sell the product, the cost of those raw materials becomes part of the COGS.
- So, COGS reduces the value of your inventory by $100, reflecting that those materials are no longer part of your unsold goods.
Therefore, while COGS itself isn’t directly listed on the balance sheet, it impacts the valuation of inventory, which is a key asset.
The other options are incorrect because:
- Increases assets: This could be true for some purchases related to COGS, but overall, COGS reduces inventory value, which is an asset.
- Decreases liabilities: COGS doesn’t directly affect liabilities (debts) of the company.
- Has no effect on the balance sheet: As explained earlier, COGS indirectly affects the balance sheet through inventory valuation