How do stock changes affect financial statements?

Changes in inventory levels directly impact the cost of goods sold (COGS), which is a critical component of the income statement. When stock levels fluctuate, it influences the calculation of COGS, as this amount reflects the cost of the inventory that was sold during a specific period. If inventory increases, it may indicate that fewer goods were sold, which can lead to a higher ending inventory and a lower COGS for that period. Conversely, if inventory decreases, it may represent a larger volume of sales, resulting in a higher COGS. This dynamic between inventory levels and COGS ultimately affects gross profit and net income, illustrating how stock changes are intrinsically linked to profitability.

The other options do not correctly capture the comprehensive impact of inventory changes on financial statements. While changes in inventory do not directly affect profitability in a straightforward manner, they certainly influence COGS and profitability through their effects on revenues and costs. Additionally, stock changes do impact both the income statement and the balance sheet, rather than being limited to just one, as the balance sheet reflects inventory levels and the income statement records COGS. Finally, stock changes do not inherently lead to permanent losses; they are part of a normal business cycle that can be managed effectively.