Final answer:
When inventory is growing faster than revenue, it can indicate operational problems such as aggressive accounting policies, recording fictitious sales, overstatement of inventory, or lower credit standards.
Step-by-step explanation:
When inventory is growing faster than revenue, it can indicate operational problems such as aggressive accounting policies to pull in sales, recording fictitious sales, overstatement of inventory to increase profits or lower credit standards. Aggressive accounting policies involve manipulating financial statements to make the company's performance appear better than it actually is. This can be done by recognizing revenue before it is earned, which can lead to a mismatch between reported sales and actual cash flow.
Recording fictitious sales refers to fabricating sales transactions that never actually took place. This artificially inflates revenue and can be a sign of fraudulent activity. Overstatement of inventory means reporting higher inventory levels than what actually exists. This can be done to inflate profits, as inventory is recorded as an asset and can be used to offset costs. Lower credit standards involve granting credit to customers who may not be creditworthy or have a high risk of defaulting on their payments. This can result in a higher rate of bad debt and lower revenue.