Purchase of Inventory


R

RBCC

How does the purchasing inventory affect Net Income? Gross Profit?
 
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P

Paul

RBCC said:
How does the purchasing inventory affect Net Income? Gross Profit?

The purchase of inventory doesn't impact the income statement at all.
Therefore, neither Gross Profit or Net Income are affected.

The purchase of inventory is a balance sheet transaction. If the inventory
is purchased for cash, debit inventory and credit cash for that amount. If
the inventory is purchased on credit, debit inventory and credit the account
payable.
 
G

Gary V. Deutschmann, Sr.

Hi Paul

Accounting is vastly DIFFERENT than REAL LIFE!

Why do I say that?

Because INVENTORY DOES affect personal income, gross income and net
income, even it it doesn't go down in the ledger that way.

If, after startup, a company makes a fixed amount of income per
product, as most do, and a new client comes along wanting different
packaging and this packaging costs X number of dollars and must be
purchased in quantity, lets say 5 years supply, to get even a fair
break on the price.

The company takes on the new client, orders and pays for this new
packaging and it wipes out almost all of the working capital to do so.
WHERE in hell is the money going to come from to meet payroll?
When were talking about MY salary, I won't get any because there is no
money left to pay it, it's tied up in inventory.

SO, INVENTORY and purchasing both DO affect INCOME, in REAL LIFE!

TTUL
Gary
 
P

Paul

Gary V. Deutschmann said:
Hi Paul

Accounting is vastly DIFFERENT than REAL LIFE!

Why do I say that?

Because INVENTORY DOES affect personal income, gross income and net
income, even it it doesn't go down in the ledger that way.

If, after startup, a company makes a fixed amount of income per
product, as most do, and a new client comes along wanting different
packaging and this packaging costs X number of dollars and must be
purchased in quantity, lets say 5 years supply, to get even a fair
break on the price.

The company takes on the new client, orders and pays for this new
packaging and it wipes out almost all of the working capital to do so.
WHERE in hell is the money going to come from to meet payroll?
When were talking about MY salary, I won't get any because there is no
money left to pay it, it's tied up in inventory.

SO, INVENTORY and purchasing both DO affect INCOME, in REAL LIFE!

The sole act of purchasing inventory does not impact the income statement.
 
B

Beverly

Gary,

There is a difference between income and cash flow.

Purchasing inventory in quantity to achieve better costs affects
current cash flow negatively while affecting current/future net income
positively (given all other things are the same).
 
G

Gary V. Deutschmann, Sr.

Congratulations Beverly!

BINGO!!!!!

TTUL
Gary
 
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J

J

Don't forget negative current cash flow needs to be funded i.e.
borrowed and interest paid on the borrowing. All in all, it's pretty
much breakeven.

Keeping is simple, purchasing inventory in itself would not effect
income. If another activity occurs eg. obsolescence, pilferage, sales
etc then income will be effected.
 

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