"What I am about to say to you may frighten you. It may frighten you so much that you'll never want to see me again in your life. But I’m going to say it. Are you ready?"

Diane squirmed slightly in her soft leather seat. The leather, Mr. Arthur Laurents had explained, was made from cows in Scotland, which were bred away from barbed-wire fences, so that their leather would be as soft as silk.

"Yes."

"I am in love with you, and I have been since I first laid eyes on you. I have seen every performance you've given. I know that I'm older than you, but I own a great many factories, and I'm about to buy more, and if you will become my bride, I will make you my queen.You will never have to worry about money, or anything else, for as long as you live. I will put your happiness first. It will dwarf what William Randolph Hearst is doing for Marion Davies. I will make sure that you become the biggest star in the history of the entertainment world. I want you not to answer me now. I want you to watch, and wait, and let me show you what I am offering."

The factory itself, even though it was in the dead of night, was ablaze with light and work. It was a cavernous place, jammed with the hubbub of construction, and Diane saw that, though they entered silently, workers' eyes and heads turned toward them, almost as one, like a spark catching a cloud of gas and igniting all along the factory floor.

"This is the company that your show is based on. You didn't know that, though, because I've not wanted anyone to know it."

An assistant appeared with a sterling silver monogrammed flask, and poured two glasses of gin.

"There’s something of yours under those files," said Laurents.

She picked up the files, and beheld what must have been the largest diamond ever set. It was surrounded with rubies, and seemed to light the entire room. She stared dumbly at the stone, then at the file in her hand.

On that file was the following:

     Balance Sheet -- Grayling Autos, Inc.
      --numbers in 000--

      Current Assets

      Cash and cash equivalents 2,400
      Accounts receivable       3,400
      Inventory                 2,000
      Prepaid Expenses            150
                                7,950

      Property & Equipment 1,080

      Current Liabilities:
      Accounts payable            650
      Accrued expenses          1,800
      Cost of Goods sold        4,600

"Those are the financials that I've drawn up for a company that I'm going to buy. The owner passed away, and his children have it now. They don't know what they're doing. I've drawn up this document to help them value their own company." He played idly with some little lettered wooden squares, which, she saw, spelled out 'Diane Mills'.

"I’m speechless," said Diane.

"I hope you will accept the ring," said Mr. Laurents. "I'm a decent man, if nothing else."

But something is amiss on the balance sheet. Why should Diane Mills suspect Mr. Arthur Laurents's decency? Because cost of goods sold:

1) Should be listed as a prepaid expense

2) Doesn't flow through inventory accounts

3) Is not a liability, and doesn't belong on the balance sheet

4) Should be included in Property & Equipment

Enter your selection in the field to the lower right, and get immediate feedback on the answer!

The Answer is 3. Cost of goods sold is an expense, not a liability, and doesn't belong on the balance sheet.

Mr Laurents, in his effort to demonstrate to the unfortunate heirs of the company he was about to buy, that their company was worth less than its real value, included cost of goods sold as a liability.

While cost of goods sold flows through the balance sheet, predominantly in the form of inventory (which is an asset) changes, there is never an item on the balance sheet called "cost of goods sold." The balance sheet is a statement of the company's financial position at a set point in time. It shows liabilities that will turn into expenses within an operating cycle, and it shows liabilities that will turn into revenues within an operating cycle. It also shows assets that will turn into expenses within that operating cycle. Cost of goods sold, though, is a product of assets and liabilities that have flowed through the balance sheet, and is always an income statement item.

An income statement is a report on the company's profit and loss for a period, and shows elements such as revenues, operating income, interest expense, and net income. Mr. Laurents is trying to understate the book value (the net worth) of the company by overstating liabilities.

"There is just one thing I want you to know. And this will tell you something about me as a person. I am offering you all I have. In return, I want an answer tonight. Now."

She looked out at the factory floor. Molten steel was being poured into molds; sparks flew and metal screamed against metal as the workers went about their business. She knew it was absurd, it was all of a piece with what had been happening to her in the past twenty-four hours. She felt faint, again, and staggered back against the desk, and heard herself say, "Yes. My answer is... yes."

She began to have flashes of a memory, of being on a boat. A Circle Line boat, near the Statue of Liberty. It felt as though she were having someone else's memory. Her hand grasped for the desktop, to steady herself, and she knocked over the wooden letters that had formed the words 'Diane Mills.' They tumbled to the floor and were rearranged into a new pattern.

They spelled 'Smile N Dial.'

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