Question

How do excessive inventories affect the following financial statements; Income Statement, Balance Sheet, and Cash Flow Statement. Is it positive or negative, be specific.

Answer 1

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.