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If for a company, the inventory increased by 260% from the previous year and the Cost...

If for a company, the inventory increased by 260% from the previous year and the Cost of Goods Sold decreased by 8%, what does this relationship mean?
Does this relationship affect the risk of material misstatement?

Business   Accounting   
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Answer #1

This relationship means that Invenotry is increasing by huge percentage but the goods are not being sold comparitively. In fact the sales have fallen by 8%.

Yes this relationship affects the risk of material misstatement because generally if the demand of the product of a company is high only then will the company be purchasing in such huge percentage. Since the demand is more, the company is going to sale more, its revenue will be more and also the cost of goods sold will be more because it shows the cost of inventory which is sold is very less as compared to sales revenue. Company's purpose behind misstating would be to show decreased cost of goods sold in order to show increased profits which will increase its value and hence share price of the company.

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