Question

In business world, companies have tied up in inventories than in cash, yet there is no call for an inventory flow statement to be prepared in annual report. Why is cash regarded as more important than inventory?

Answer 1

Importance of cash than Inventory :

1. Cash is so important because it later becomes the payment for things that make your business run: expenses
  like stock or raw materials, employees, rent and other operating expenses.

2. Cash inflow is the lifeblood of your business and comes from sources like payments from customers, receipt of a
loan, monetary infusion from an investor, or interest on savings or investments.

3. The importance of cash flow statement is that it is used to measure the cash position of the business

4. Cash flow statement is used for the purpose of the short term planning, along with keeping the control of cash.

5. The company needs the cash for meeting the various obligations that could arise in the near future, like payment of the debts, various operating expenses, etc.

6. The excess cash can be created if the company can collect the receivables from its customers faster if the company uses the inventory in an efficient manner

7. The importance of the Cash Flow Statement is that it helps the company in ascertaining the Optimum level of Cash Balance.

8. It is necessary for the company to determine the optimum level of Cash Balance because this firm can know whether the funds of the company are lying idle, or there is a shortage of cash or the funds are excess.

9. As the liquidity position is known, any shortfalls can be arranged for or excess can be used for the growth of the business

10. Inventory is also an important current asset but it cannot be covertible into liquid form easily, so the Cash is more important than the Inventory.