Question

• Explain how decoupling inventory is used to to improve operational efficiency.
• Discuss how inventory impacts the balance sheet and the income statement of on organization.  
• How do organizations use the measure of inventory turns and days of supply to help manage their inventory?

Answer 1

answer-

1- Decoupling inventory is used to improve operational efficiency because having decouple inventory is like safety stock of sort which helps an organization to maintain its production and deal with production line issues. This inventory helps to to deliver products or services to its customers in the most cost-effective manner possible while still ensuring the high quality of its products, service and support.

when organization with decouple inventory able to manufacture or do production process without any issue at low cost then operational efficiency increases or improves.

2-Inventory has impact on income statement as well as balancesheet of an organization because If there are any errors in calculating inventory, there would be cascading effects on COGS, profits and income. There are several reasons why your inventory might be inaccurate. Some instances include breakage during transit, not adding returned goods to inventory and old goods which might have to be sold at a discount. In all such cases, you need to adjust your inventory to an accurate value .

If a business uses FIFO when prices are rising and inventories are also rising, COGS would be low and net income would be higher. As a result, the company would have to pay higher taxes. This would result in a lower cash flow for the firm.

Change in inventories and incorrect inventory balances affect your balance sheet, the financial statement that is a snapshot of your company’s worth based on its assets and liabilities. An incorrect inventory balance can result in inaccurate reported value of assets and owner’s equity on the balance sheet. However, it does not affect liabilities

3- organizations use the measure of inventory turns and days of supply to help manage their inventory by using financial ration like following-

Inventory turnover measures a company's efficiency in managing its stock of goods. while The days sales of inventory (DSI) is a financial ratio that indicates the average time in days that a company takes to turn its inventory, including goods that are a work in progress, into sales.

Generally, a lower DSI is preferred as it indicates a shorter duration to clear off the inventory, though the average DSI varies from one industry to another.

DSI=Average inventory/COGS×365

where:DSI=days sales of inventory

COGS=cost of goods sold​

Since DSI indicates the duration of time a company’s cash is tied up in its inventory, a smaller value of DSI is preferred. A smaller number indicates that a company is more efficiently and frequently selling off its inventory, which means rapid turnover leading to the potential for higher profits (assuming that sales are being made in profit). On the other hand, a large DSI value indicates that the company may be struggling with obsolete, high-volume inventory and may have invested too much into the same .

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