Inventory is often referred to as the graveyard of business because over investment in stock is...

Inventory is often referred to as the graveyard of business because over investment in stock is a frequent cause of business failure.
Reflecting on what you have learned what is meant by that?

Expert Solution

The given statement is quite correct because inventory is an item of current asset and any over-investment in stock directly implies that the working capital of an entity is unnecessarily tied up due to blockage of funds in having unnecessary inventory. This results in excessive storage required for storing such excess inventory and which leads to excessive cost of insurance. The entity also faces liquidity risk because the inventory value declines once it is held for a long duration of time, the reason being the fact that it is very difficult to dispose-off the purchased inventory at the same value.

That's why it is very much necessary that there is an efficient inventory control system in place and operating within the entity to make sure that the right amount of stock is available at the right time and at the right place. This helps in coping with the above highlighted problem by allowing the entity to free up cash along with having the right amount of inventory in hand.

ekkarill92 answered 1 year ago

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