The Desired Level of Inventories Is the Level at Which

question 312

Multiple Choice

The desired level of inventories is the level at which the extra cost (in lost sales) from lowering inventories by a small amount is

• A) greater than the extra gain (in interest revenue and decreased storage costs).
• B) zero.
• C) less than the extra gain in (in interest revenue and decreased storage costs).
• D) just equal to the extra gain (in interest revenue and decreased storage costs).

---

Definitions:

External Financing

Funding obtained from sources outside the company, including bank loans, issuance of equity or debt, and other borrowing avenues.

Sales Forecast

An estimation of the sales a company expects to achieve over a certain period in the future.

Additional Funds Needed (AFN)

Those funds required from external sources to increase the firm’s assets to support a sales increase. A sales increase will normally require an increase in assets. However, some of this increase is usually offset by a spontaneous increase in liabilities as well as by earnings retained in the firm. Those funds that are required but not generated internally must be obtained from external sources.

Pro Forma Financial Statements

Financial documents that project a company's future financial performance based on certain assumptions.