The income statement is one of the three primary financial statements companies use to form a well-rounded view of their operating and financial health. The income statement records the financial and accounting numbers tied to your company's sale and profit generation activities. Inventory is typically a balance sheet item, but fluctuations in inventory do appear in the cost of goods sold number on the income statement.


Inventory includes raw materials, work in process, finished goods and stock awaiting sale. The description of inventory varies by industry or company type, but, for all businesses, inventory is either goods ready to be sold or in the process of being manufactured or produced for sale. Inventory appears on the balance sheet as a current, or short-term, asset.

Cost of Goods Sold

The cost of goods sold, or COGS, is the cost of the products or merchandise actually sold to customers. COGS includes the cost your company incurred to purchase or create the physical inventory plus any additional direct labor, supply or shipping and transportation costs. When your company sells a product, the revenue and its corresponding COGS appear on the income statement. Some companies break out the separate COGS components to show detail; others simply show the aggregate COGS number.

Impact of Inventory

As your manufacturing, distribution or retail business sells its products, the revenue generated appears on the top line of your company's income statement, and the COGS associated with it appears directly below revenue. As you adjust the inventory's cost basis, the adjustment appears in COGS. If inventory adjustments are made to reflect damage or theft, COGS will increase. If a supplier discounts a shipment, inventory costs decrease, as does COGS. All inventory adjustments impact your company's income statement via COGS.

Income Statement

Your company's income statement is important because it documents operational performance over a particular period of time, typically a month, quarter or year. The income statement shows you how well your company converted revenues to profits. Revenue less COGS provides the gross profit number, which shows how much of each sale goes to product costs. Your company's overall profitability level appears as net income at the bottom of the income statement.


Say RJ Cup Company sells paper cups and other products to event planners. Its average inventory cost is $0.20 per cup. For 50,000 cups sold, the COGS shown on the income statement is $10,000. However, on January 3, the roof leaked, causing damage to 25,000 cups. These had to be destroyed. As a result, the cost increased to $0.40 per cup, resulting in a COGS of $20,000 for 50,000 cups that month. On April 1, RJ Cup bought 100,000 cups at a large discount, reducing the inventory cost to $0.15 per cup. The COGS decreased to $15,000 for those 100,000 cups.