How should the impact of increasing inventory be reflected on the SPL?

When assessing how the impact of increasing inventory should be reflected on the Statement of Profit or Loss (SPL), recognizing that inventory increases lead to a decrease in the cost of goods sold (COGS) is crucial. This is because inventory is considered a current asset that represents goods available for sale.

If a company increases its inventory, it implies that more goods are being produced or purchased than sold within that period. Since COGS is calculated based on beginning inventory plus purchases minus ending inventory, a greater ending inventory reduces the COGS reported on the SPL. Since COGS is subtracted from sales revenue to determine gross profit, a lower COGS can lead to a higher gross profit, which, assuming sales remained constant, can positively affect net income as well. Thus, the correct interpretation is that increasing inventory results in a decrease in COGS on the SPL, influencing overall financial performance.

The other options do not accurately reflect the accounting treatment of increasing inventory in the context of the SPL. An increase in net income does not occur directly from increasing inventory; it depends on many factors, including sales. It is also essential to differentiate that an operating loss is unrelated to simply holding increased inventory, which reflects retained goods rather than operational ineff