Cases in Financial Reporting Case 3.docx - Concepts A-D A...

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Concepts A-D A) Explain the risks and benefits associated with holding inventory. a. Benefits: i. Holding Inventory Avoids Loss of Sales : In a scenario in which a firm maintains inventory, it can fulfill the customer’s order without any delays due to a material shortage. Furthermore, this prevents the loss of customers in a time constraint and prevents the loss of sales due to shortages where a client can go to a competitor for quicker fulfillment. ii. Holding Inventory Reduces Order Cost : By ordering items in large quantities, a company/client can reduce the cost that can be incurred vs ordering single units at a time. iii. Holding Inventory Gains Quantity Discount : If a company/client places a large order of materials, the supplier of the materials can be generous by discounting the prices for a larger order. By reducing the cost with this discount, the cost of good of the company/client will decrease and increase profits earned on the sale. b. Risks: i. Risk of Price Decline : Holding inventory can lead to an increased risk of the price of inventory declining. This decline can be caused by competitors increasing products within the market supply, introduction of an innovative and

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