Question

Inventory growing faster than revenue can indicate operational problems involving:

a. lower credit standards
b. recording fictitious sales
c. improper overstatement of inventory to increase profits
d. aggressive accounting policies to pull-in sales

Answer 1

When inventory is growing faster than revenue, it can indicate operational problems involving lower credit standards, recording fictitious sales, improper overstatement of inventory to increase profits, and aggressive accounting policies to pull-in sales.

Step-by-step explanation:

When inventory is growing faster than revenue, it can indicate operational problems involving a few different factors:

1. Lower credit standards: This means that the company is extending credit to customers who may not have the ability to pay, resulting in lower revenue and higher inventory.
2. Recording fictitious sales: If the company is falsely recording sales that have not actually occurred, it can lead to an overstatement of revenue and an imbalance between inventory and revenue.
3. Improper overstatement of inventory to increase profits: If the company is intentionally inflating the reported value of its inventory, it can make it seem like the business is more profitable than it actually is.
4. Aggressive accounting policies to pull-in sales: This refers to practices where a company accelerates the recognition of revenue to increase sales. This can lead to a buildup of inventory if the actual sales do not materialize.