When a __ is made, the value of the product is moved from inventory (a balance sheet item) to cost of goods sold (an income statement item). sale credit fixed asset loan
The correct answer and explanation is:
The correct answer is sale.
Explanation:
When a sale is made, the value of the product sold is transferred from inventory (which is an asset on the balance sheet) to cost of goods sold (COGS), which is an expense on the income statement.
Here’s how it works in detail:
- Inventory represents the goods a company has purchased or manufactured but has not yet sold. It is recorded as a current asset on the balance sheet because it holds value that the company expects to convert into cash through sales.
- When a product is sold, the company no longer owns that inventory; instead, it has earned revenue from the sale. To reflect this change, the company removes the cost of the sold inventory from its balance sheet.
- The cost of that inventory becomes an expense called Cost of Goods Sold on the income statement. COGS represents the direct costs attributable to the production of the goods sold by a company.
- This transfer ensures that the financial statements accurately reflect the company’s expenses during the period and match those expenses with the related revenues from sales, following the matching principle in accounting.
The other options are incorrect because:
- Credit refers to a type of accounting entry, not an event that moves inventory cost.
- Fixed asset relates to long-term assets like machinery or buildings, not inventory.
- Loan is a liability and does not affect inventory or COGS directly.
Summary:
- Sale triggers the movement of value from inventory (asset) to cost of goods sold (expense).
- This aligns expenses with revenues in the income statement.
- It reflects the actual cost related to the products that generated revenue during the period.
This accounting treatment is crucial for accurate financial reporting and helps stakeholders understand the profitability and operational efficiency of a business.