Why is the Income Statement unaffected by changes in inventory?

The correct rationale for why the Income Statement is unaffected by changes in inventory aligns with the idea that inventory not being sold is crucial. When inventory is still held by a company, it does not impact the Income Statement because no revenue has been recognized, and correspondingly, no expenses related to the cost of goods sold have been incurred. The Income Statement reflects revenues and expenses tied to the sales made during the accounting period. Thus, until inventory is sold, it remains an asset on the Balance Sheet rather than affecting the Income Statement.

The other options do not accurately address the reasoning behind the relationship between inventory changes and the Income Statement. For instance, while inventory is typically reported at historical cost, this does not explain why it doesn’t impact the Income Statement until it’s sold. Similarly, saying inventory is excluded from operating expenses is misleading, as the cost of goods sold (which is impacted by inventory) does factor into determining profit. Lastly, while only finished goods affect the Income Statement in the context of product sales, this does not clarify the broader concept that any unsold inventory does not influence the income figures until it is converted to revenue through a sale.