Question

The 2nd entry shows the cost of the sale, an expense, mainly cost of goods of sold as increasing. Expenses cause equity to decrease. Inventory, an asset is also decreasing.

True
False?

Answer 1

Yes, the statement is true. An increasing cost of goods sold leads to a decrease in equity, and the reduction of inventory indicates that assets are also decreasing.

Step-by-step explanation:

The statement you've asked about, referring to inventory and equity when sales costs increase, touches on basic accounting principles and reflects an understanding of how different transactions affect financial statements. The increasing cost of goods sold (COGS) will indeed cause a decrease in a company's equity because expenses reduce the net income, which in turn reduces the owner's equity. Simultaneously, the reduction in inventory signifies that assets are decreasing as the goods are being sold or used in the production process.

Therefore, the statement that inventory, an asset, is decreasing while the cost of sales, an expense, is increasing, thus causing equity to decrease, is generally true. The statement "In the goods market, no seller would be willing to sell for less than the equilibrium price" is false. In the goods market, the equilibrium price is the price at which the quantity supplied equals the quantity demanded. However, sellers in the market may still be willing to sell for less than the equilibrium price due to factors such as competition, inventory management, or promotional pricing strategies.