Why is inventory an important item to both internal (management) and external users of financial statements?
Explain the reason, for considering an inventory as an important item in both internal and external users of financial statements.
Explanation of Solution
Inventory:
Inventory refers to the raw materials, work-in progress, and the finished goods products that are held by the business to sell or make it ready for sale, in the future date.
The reason why an inventory is considers as an important item by both internal and external users of financial statements are described as follows:
- The inventory is considers as an important item because it is often listed as a largest amount under the assets side of the balance sheet. Thus, the inventory is characterized as significant amount of the resources available to the business.
- For internal users of financial statement the inventory control is very important. This is because, when an inventory is purchased in excessive amount, it would results in a needless waste of resources. Similarly when inventory is purchase in too low quantity then, it would result in lost sales.
- On the other hand, the inventory uses a direct impact on the amount of income on the income statement. Due to this impact, the statement users are particularly interested in the effects of the amount and the way in which the inventory is measured.
Thus, all the statement users are specifically interested on the inventory is because, of its impact on both income statement and balance sheet.
Want to see more full solutions like this?
Chapter 7 Solutions
FIN.ACCTG:ACC 101 CUST.CONNECT-W/ETXT C
- Why do consignment arrangements present a challenge in inventory management? Explain.arrow_forwardWhich of the following is not an element of the financial statements? A. future potential sales price of inventory B. assets C. liabilities D. equityarrow_forwardThe following information is taken from a companys records. Applying the lower-of-cost-or-market approach, what is the correct value that should be reported on the balance sheet for the inventory?arrow_forward
- What is a perpetual inventory accounting system? What journal entries are involved?arrow_forwardWhy is inventory management vital to the financial health of most firms?arrow_forwardWhat are the exceptions to historical cost valuation of inventory allowed under generally accepted accounting principles?arrow_forward
- How long does it take an inventory error affecting ending inventory to correct itself in the financial statements? Explain.arrow_forwardHow do the subject matter of reports and the verification of reports differ between financial accounting and managerial accounting?arrow_forwardExplain why a company might want to utilize the gross profit method or the retail inventory method for inventory valuation.arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningPrinciples of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax CollegeSurvey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage Learning
- Auditing: A Risk Based-Approach (MindTap Course L...AccountingISBN:9781337619455Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:Cengage LearningIntermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningManagerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub