Chapter 7, Problem 1Q

Why is inventory an important item to both internal (management) and external users of financial statements?

To determine

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.

Conclusion

Thus, all the statement users are specifically interested on the inventory is because, of its impact on both income statement and balance sheet.