A poster says that increases in inventory are taxable as income, but I've never heard of such a thing. From what I understand, inventory is simply an exchange of one current asset (cash) for another (goods.

I don't read it the way you did. What I read it as is the expenses that can be deducted are only the expenses of the goods that have actually been sold. Thus, the costs associated with goods in inventory (i.e. not yet sold) is not yet deductible. So, it's not so much that the increase in inventory is taxable income, it's that the income that was spent to increase the inventory doesn't have a taxable deduction yet, so it's all still taxable.

I think the example that the other poster gives illustrates this quite clearly:

To make it simple.

He purchased $100.00 of inventory.

Let's say he had a 50% margin, selling price if he sold it all would be $200.00.

Total sales were $150.00 worth.

150 is gross income
75 is cost of goods sold

75 is net income.

He can't deduct the full $100.00 that he paid for the inventory.

What he wanted to do

150.00 gross income
100.00 inventory purchases

50.00 Net income.

But since he only sold 3/4 of his inventory he couldn't deduct the cost of the remainder.

AJ