no change in Net Income???

CFA Level I
#1

Hey, Books Forever Inc. starts to use Notes Payable to buy Inventory. The “answer people” said that this would have no change on Net Income. How is that? Wouldn’t the note payable payment be taken out of gross income?

#2

Notes payable is a balance sheet account, a liability (anything with payable in it is a liability). Why would you think it would be taken out of gross income?

#3

you still record the cost of goods sold. the method of payment just affects cash flow not net income

#4

you can use anything to purchase inventory (cash, notes payable, or other means). The bottom line is it will be recorded as COGS. The payment means doesn’t change the COGS amt, and thus does not change NI.

#5

That makes sense. Thanks.