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What is the effect of an increase in inventory on the profit of a sole trader?
What is the effect of an increase in inventory on the profit of a sole trader?
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Practice Questions
1 question
Q1
What is the effect of an increase in inventory on the profit of a sole trader?
Increases profit
Decreases profit
No effect
Depends on the accounting method
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An increase in inventory typically decreases profit as it indicates that more resources are tied up in unsold goods.
Questions & Step-by-step Solutions
1 item
Q
Q: What is the effect of an increase in inventory on the profit of a sole trader?
Solution:
An increase in inventory typically decreases profit as it indicates that more resources are tied up in unsold goods.
Steps: 5
Show Steps
Step 1: Understand what inventory is. Inventory refers to the goods a sole trader has for sale.
Step 2: Recognize that an increase in inventory means the sole trader has more unsold goods.
Step 3: Realize that when goods are not sold, the money spent to buy or produce those goods is not coming back as profit.
Step 4: Acknowledge that having more unsold goods ties up cash that could be used for other business expenses.
Step 5: Conclude that because more money is tied up in unsold inventory, the overall profit of the sole trader decreases.
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