Question

The inventory is increased by 1,626,000 from 2017 to 2018

The increase in inventories is primarily due to an increase in concession inventories for anticipated business volumes and higher amusement solutions and digital media inventories as a result of the growth in the businesses. (Management Explanation).

Is this a reasonable explanation? What other reasons could have resulted in this change?

Answer 1

Answer: Rise in inventory levels can be due to following reasons:

a) Increase in demand resulting in increase in volume of sales as a result of which higher levels of inventory may be required to be maintained.

b) Over production of goods when economy has slowed down and there is not enough consumption/demand of goods, it may lead to high levels of inventory.

c) there are slow moving and obsolete inventories which are being piled up year after year, it can be checked by looking at the ageing of the inventories in hand and an adequate provision shall be made in such a case.

d) The inventory records are incorrect due to over recording of purchases during the year, this can be checked by physically verifying the goods.

e) Inadequate planning by the management can also lead to higher level of inventories resulting in higher carrying cost which can reduce the profits of the company.

Thus, it can be concluded that though increase in inventories for growth in business volumes or business may be a reasonable explanation as also stated in point (a) above, there may be other reasons as well which have been stated above.