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Question

At a recent company meeting, an employee remarks: "We were working so hard to get the income for our bonus this year. Then they got all that raw material inventory in-and even paid it. We don't need it yet. Why didn't they wait until January?" Will the raw material inventory affect this year's income? Does it matter whether it was paid for this year or in January? Explain.

Answer 1

If you don't need the inventory, then buying it in Dec or Jan doesn't affect the income. You'll increase the purchases, but you'll also increase the ending inventory, so COGS is the same. However, if they paid for the inventory, then it decreases the cash available for bonus payments in Dec.