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Dear John sir,please consider the following question.
There are 27500 units on order with suppliers and 16250 units outstanding on existing customers orders.if free inventory is 13000 units what is physical inventory?
Sir the answer is1750.to get that we must add units in inventory & units on order from suppliers& then deduct units outstanding on customers orders.
Sir I don’t understand why units still on order from suppliers are counted as inventory ? Because if we haven’t received them how come they be part of our present inventory?Suppose a customer rings up and says that they want (say) 10,000 units and wants to know if you are able to supply them.
You will look at the physical inventory (how many we actually have) but subtract any that have already been promised to customers and add any new ones we expect to receive, in order to decide whether we will be able to supply the 10,000 units.
The amount we will be able to supply is the free inventory. This will include those new items we are expecting the receive and will not include those items already promised to customers. This question wants you to work backwards in order to find out how many we actually have in physical inventory.
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