Inventory doesn’t just sit on shelves—it also plays a major role in shaping a company’s financial reports. The way you value, manage, and adjust your inventory directly affects your income statement, balance sheet, and even cash flow.

“Inventory affects profit, assets, and tax obligations—so it’s more than just stuff in storage.”

Let’s see how.

The Cost of Goods Sold (COGS) is one of the largest expenses on the income statement, and it comes directly from inventory. The method used to calculate COGS—whether it's FIFO, LIFO, or Weighted Average—can significantly affect your reported profit. A higher COGS results in lower net income, while a lower COGS leads to higher net income. For example, during times of rising prices, using FIFO will typically show more profit because older, cheaper inventory is counted as sold first. On the other hand, LIFO will show less profit since it uses newer, more expensive inventory first. This difference not only impacts profit reporting but also influences the amount of tax a business may owe.

Your ending inventory is listed as a current asset on the balance sheet. If inventory is overstated, your total assets and equity will also look higher than they really are. If it’s understated, the opposite happens. That’s why accurate inventory counts and valuation are critical for a reliable balance sheet.

Good inventory records help you make smarter decisions—like when to reorder, how to price products, or whether to scale your operations. Poor inventory tracking, on the other hand, can lead to stockouts, overstocking, or lost profits.

✅ Inventory affects COGS and net income on the income statement
✅ It appears as a current asset on the balance sheet
✅ Inaccurate inventory = misleading financial statements
✅ Inventory valuation also affects tax liability
✅ Managing inventory well supports better business decisions