In: Accounting
Pick a company that has a significant amount of inventory on their balance sheet and read the inventory note(s) in the financial statements. Tell us what unique challenges they face in dealing with those inventories.
The given question should be considered as per auditing point of view as well as accounting point of view.
As far as auditing point of view the following points should be considered.
1) Undertake physical verification of of inventory to ensure the inventory shown in the balance sheet is correct
2) Ensure all the inventories are in salable condition
3) Inventories are produced over a period of time, not at the end of the accounting year to cover huge loss.
4) Proper inventory control system is adopted.
5) Inventory is valued properly.
As far accounting point of view following points should be considered.
1) Inventory should satisfy the liquidity function.
2) Invenories are not slow moving.
3) They are not perishable in nature.
4) Inventory turn over ratio is Desirable.
Following are the challenges to be faced in dealing significant amount of inventory
1) Capital Cost : Company should require additional fund to meet the cost of inventory
It results blocking the companys financial resources.
2) Obsolescence : The inventories may obsolete due to technolocal changes, customer preference etc.
3) Deterioration : long storage life may affect the quality of materials.
4) Storage and Handling cost : Holding significant amount of inventories causes huge storage and handling cost.
5) Price decline : Unfavorable market conditions, new competitors etc. will cause decline in price of inventory.