Question
In: Accounting
How do excessive inventories affect the following financial statements; Income Statement, Balance Sheet, and Cash Flow...
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How do excessive inventories affect the following financial statements; Income Statement, Balance Sheet, and Cash Flow Statement. Is it positive or negative, be specific. |
Solutions
Expert Solution
Excessive inventory is a situation where the demand exceeds the product produced which leads to unnecessary blockage of funds by producing excessively and also resulting in the depreciation of the asset and losing its value.Bad demand forecasting and inefficient inventory management is the root cause of excessive inventory.
Effect of excessive inventory on the income statement
Excessive inventory has a negative effect on the income statement because net profit is overstated because if an inventory increases it results in an increase of gross profit and an increase in gross profit will lead to an overstated net profit.
Effect of excessive inventory on the Balance sheet
The balance sheet will not have a positive or negative impact on excessive inventory. It only shows how much the quantity of inventory and it does not have any impact on the balance sheet.
Effect of excessive inventory on cash flow statement
Excessive inventory will have a negative effect on the cash flow statement because unnecessary cash outflow had occurred which affects a shortage of cash balances of the company which makes the cash flow statement negative.
ekkarill92 answered 2 years agoRelated Solutions
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Year ended May 31
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2011
2010
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Gross profit
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note: post solution not photo
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