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what about capitalizing the inventory? If the inventory is expensed such as the freight instead of...

what about capitalizing the inventory? If the inventory is expensed such as the freight instead of being capitalized, how does this possibly effect the financial statements

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Answer #1

As per GAAP accounting, Inventory is charged off on actual basis to the period to which it belongs as per income matching concept. Capitalizing the inventory will result in adding it in assets and providing depreciation on it. It will result in charging off inventory not to the period to which it belongs.

It will distort the profitability of business. For example- A business doing excess sales will show higher profitability due to fixed depreciation cost. Against this, a busines doing less sales will report lower profitability.

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