Financial Accounting: In an Economic Context

THE RELATIVE SIZE OF INVENTORIES

Note in Figure 7-1 that financial institutions and Internet firms carry little or no inventories, while inventory is very important to retailers and, to a lesser extent, to manufacturers. Inventory is by far the largest current asset for grocery store chains like Kroger; and for retailers like Lowe's, JCPenney, and Wal-Mart, efficient and effective inventory management is the key barometer for their success. Manufacturers, like GE, invest in inventories because raw materials are necessary for the manufacturing process, but because carrying inventory is costly, they strive to minimize inventory levels, hoping to send their finished products to distributors and retailers as soon as possible. Similarly, companies that extract natural resources, like Chevron, attempt to ship their product to refineries and processing stations, and then to market, as soon as it is taken from the ground.

FIGURE 7-1 Inventory as a percentage of total assets and current assets

Both Hewlett-Packard, a world leader in technology development, and Yahoo!, a well-known Internet portal and search engine, play important roles in today's high-tech business economy. One carries virtually no inventories while the other carries a substantial amount. Which is which? Explain.