Reading 21:Inventories: Implications for Financial Statement 2011, company, center, issues, should

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Session 5: Financial Reporting and Analysis: Inventories and Long-lived Assets
Reading 21: Inventories: Implications for Financial Statements and Ratios

LOS f: Discuss issues that analysts should consider when examining a company's inventory disclosures and other sources of information.

 

 

Tim Rogers is senior equity analyst with White Capital LLP. While analyzing the financial statements of Drako Toys Inc., a toy manufacturer based in Cleveland, Ohio, Tim concludes that Drako is expected to see above-average sales growth over the next three years. Which of the following conditions most likely support Tim’s conclusion?

A) Finished goods inventory growing faster than sales in the last two years.

B) Increase in finished goods inventory and corresponding decline in raw-materials and work-in-progress inventory over the last two years.

C) Increase in raw-materials and work-in-progress inventory and corresponding decline in finished goods inventory over the last two years.

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An increase in raw materials and/or work-in-process inventory is probably an indication of an expected increase in demand. Conversely, an increase in finished goods inventory, while raw materials and work-in-process are decreasing, may be an indication of decreasing demand. Finished goods inventory that is growing faster than sales may be an indication of declining demand.