Page 57 - Finance for Non-Financial Managers

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Finance for Non-Financial Managers
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Failing to Control Inventory Losses
Can Cost a Bundle!
Companies maintain inventories of their products so
they can promptly satisfy customer demand for those products.The
risk for any company is that it will keep inventory on hand that never
sells or that sells only at a deep discount, for a variety of reasons,
including the following:
• It has more than its customers wanted (such as new cars at the end
of the model year).
• It stocked items that its customers didn’t want to buy (such as
marked-down fashion clothing at the end of the season).
• The inventory became useless before anyone bought it (such as
perishable food in the supermarket or a technology product that
became obsolete as a result of a competitor’s innovations).
• Inventory was lost or was damaged or simply disappeared from
theft or other causes and was not available to sell.
When there are losses, inventory is revalued at a new, net realizable
amount, and the difference becomes an expense on the company’s
books. Such expense can, if not properly controlled, become a large
and unpleasant shock to a company’s profit expectations. Companies
typically examine and count their inventory periodically—at least
annually or as often as monthly—in order to avoid unexpected losses
in value.

costs needed to make the products, including labor and
related overhead costs, such as factory rent, supervision,
and product inspection.
By contrast, retailers, distributors, and trading companies
usually purchase fully manufactured products, which they sim-
ply resell, without processing them any further. Their balance
sheet will most likely show only a single line called inventory.
Prepaid Expenses

An unusual asset among current assets, prepaid expenses will
never, except in rare cases, be turned into cash, in spite of our
noting above that such conversion is a typical characteristic of
current assets. Prepaid expenses are exactly that—expenses
that have been paid in advance and therefore won’t have to be