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Effect of Sale on Balance Sheet

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    • DollarsToDonuts
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      Ok everyone, it took me awhile to gather the courage to ask this question as it is such a basic accounting question but:

      How does one sale of inventory affect the balance sheet?

      I have no idea why I can’t answer this completely…chalk it up to CFA brain I suppose, but it was just one of those questions I asked myself and then suddenly realized I couldn’t answer it completely which has scared the living daylights out of me.

      I know it would increase cash or accounts receivable depending on the transaction, decrease inventory, and increase equity (via retained earnings), but I can’t remember by which amounts.

      Can anyone provide an example/explanation and relieve me of my temporary bout of insanity?

    • edulima
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      Let me try: suppose you sell for $100 an item in your inventory that cost you $60. If you sell it for cash, the $100 comes into the “Cash” account; if on credit, into the “A/R” account, increasing assets. To balance it, the “Retained Earnings” account goes up by $100 (through the “Revenue” account in the Income Statement). On the cost side, your “Inventory” account goes down by $60 and a balancing decrease of $60 comes into the “Retained Earnings” account through the “COGS” account in the Income Statement. Hope this helps.

    • DollarsToDonuts
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      @edulima thank you so much! and what if we were to throw in a tax assumption (say 25%)?

    • edulima
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      @DollarsToDonuts no problem and good follow-up question. I think the tax you’re referring to is a “corporate income” tax, right? In that case, the first thing to consider is how the accounting tax treatment differs from the statutory tax treatment. I guess the simplest case is to assume that tax is paid in cash in the same period (so no deferred tax asset or liability). Net income for the item in our example was $40 pre-tax, so it gets reduced by a $10 tax expense. This tax transaction is reflected in balance sheet as a $10 reduction in the “cash” account and a $10 reduction in the “retained earnings” account through the “tax expense” account in the Income Statement.

      The next complicating factor would be to defer the tax, and here I’m getting away from my comfort zone :-), but ultimately the impact should be a “transfer” from the “cash” account to a “deferred tax asset/liability” account.

    • DollarsToDonuts
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      @edulima thanks so much edulima. this really cleared things up and helped to reassure myself that i’m not going crazy!

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