The Comprehensive Guide on How to Read a Financial Report: Wringing Vital Signs Out of the Numbers, + Website

CHAPTER 8

COST(S) OF GOODS SOLD EXPENSE AND INVENTORY

Exploring Our Second Critical Link

Chapter 7 provides a close examination on the connection between sales revenue and accounts receivable. As we progressed through the chapter, various issues were identified relating to how companies record accounts receivable and recognize sales revenue in their financial statements, which provide a company’s management with, shall we say, a certain amount of leeway. But if you thought the accounting for sales revenue and accounts receivables was flexible, you haven’t seen anything yet as differing (but completely valid) costs of goods sold expense and inventory accounting methods are available for use (as well as abuse) by company management, which can significantly impact a businesses operating results.

Countless examples, case studies, and other articles have been presented over the years related to inventory fraud and include everything from electronics (Crazy Eddie’s) to salad oil (the famous Salad Oil Swindle) to copper wire (Laribee Wire Manufacturing Company not valuing inventory to market). Unfortunately, the reason for so many examples is based on the fact that when companies get desperate, inventory manipulation is often one of the easier areas to fool the auditors with (as auditing inventory is difficult, complex, and often cumbersome).

Similar to the concepts discussed in Chapter 7 on sales and accounts receivables, the idea behind providing the examples on various types of unsavory ...