Chapter 3Aggressive Inventory Management

 

After revenue recognition, inventory is the second most important factor for earnings quality analysis.

When a company creates product inventory, it invests cash. Management spends the Benjamins well or poorly, depending on its skill at judging business trends. The risk is that, the longer inventory ages, the greater the possibility that the company is misallocating cash, misjudging the market and may have to write down inventory. Therefore, inventory affects profitability via gross margin on the income statement and shows demand for a company’s products.

We analyze inventory numerous ways on the balance sheet to get a better sense of the impact it may have on the company’s product demand. Similarly ...

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