We start selling frozen foods 🥳

Since our restaurant still have space, we decided to buy one large freezer (How do we capitalize the purchase of this freezer?) to store and sell frozen foods. We need to buy frozen foods from our suppliers before we sell them. Although we must pay cash for these supplies, we cannot report them as expenses on the Income Statement until we sell the products.

So, our income statement has not changed: Net Income is still $56,164. Our Net Change in cash is decreasing due to inventory purchases, which we have set at $22,000 as shown below. Since we buy inventory from our suppliers, we report this with a negative value; it decreases our cash flow.

Cash Flow StatementYear 1Year 2
Net Income28,804.0056,164.00
Changes in working capital
(Increase)/Decrease in Inventory0.00(22,000.00)
(Increase)/Decrease in Accounts Receivable0.00(45,000.00)
(Increase)/Decrease in Prepaid Expenses0.00(16,000.00)
Increase/(Decrease) in Accounts Payable0.004,000.00
Increase/(Decrease) in Deferred Revenue0.0011,500.00
Net Change in Cash28,804.00(11,336.00)

We need to show Inventory as an asset on the Balance Sheet because we can sell inventory to make money in the future. If inventory were to decrease, the scenario would be reversed: we would list it in the income statement under Cost of Sales, along with the revenue from the sale of the products, and the Change in Inventory would be positive in the Cash Flow Statement.

Balance SheetYear 1Year 2
Accounts Receivable0.0045,000.00
Prepaid Expenses0.0016,000.00
Total Assets30,000.00101,664.00
Liabilities & Equity
Accounts Payable0.004,000.00
Deferred Revenue0.0011,500.00
Total Liabilities & Equity30,000.00101,664.00

Impact of Inventory to the Financial Statements in a Glance

Impact of Inventory to the Financial Statements in a Glance

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