Knowing how much inventory is on hand helps managers make decisions about how much merchandise to purchase. Too much inventory means the business has not sold what it purchased and its money is tied up in inventory. A business that holds too little inventory may run out often and need to make frequent purchases which increases costs. It also can lose business when customers go to a competitor to purchase an out-of-stock item. Higher costs and out-of-stock situations mean lower profits. 

INSTRUCTIONS 

Use PETsMART’s balance sheet and Dear Fellow Stockholders letter in Appendix F to answer the following questions.

1. How did PETsMART’s merchandise inventory change from 2003 to 2004?

2. What could have caused this change?