Question

Which statement(s) below correctly describe(s) the relationship of cost of goods sold and ending inventory?

1) Cost of goods sold is the expense incurred to produce the goods that were sold during a specific period.
2) Ending inventory is the value of goods that remain unsold at the end of a specific period.
3) Cost of goods sold and ending inventory are both important components of the income statement.
4) The cost of goods sold is subtracted from the revenue to calculate the gross profit.
5) The ending inventory is reported on the balance sheet as an asset.

Answer 1

The correct statements about the relationship between cost of goods sold and ending inventory are: (1) Cost of goods sold is the expense for producing goods sold within a period, (4) it's subtracted from revenue for gross profit calculation, and (5) ending inventory is an asset on the balance sheet.

Step-by-step explanation:

To understand the relationship between cost of goods sold and ending inventory, we need to look at how they both factor into the financial statements of a business. Here are the accurate statements regarding their relationship:

1. Cost of goods sold is indeed the expense incurred to produce the goods that were sold during a specific period.
2. Ending inventory represents the value of goods that remain unsold at the end of a specific period.
3. The statement that cost of goods sold and ending inventory are both components of the income statement is incorrect; while cost of goods sold appears on the income statement, ending inventory is reported on the balance sheet.
4. It is correct that the cost of goods sold is subtracted from the revenue to calculate the gross profit.
5. The statement that ending inventory is reported on the balance sheet as an asset is correct.