On still another hand (are we up to more than two, yet?), look at what years are covered. If this represents obsolete inventory write-downs, does it call into question the management capability to guess right on amounts to pay for inventory items? If it is write-downs because inventory ‘values’ have been plummeting, what is the long-term prospects for this business? I could actually be talked into that approach for a one-off adjustment.īut increasing amounts over the four years makes me wonder. The recognition of the write-down after the fact does not reflect cash outflow in the years being analyzed. If the inventory was purchased (and therefore the cash spent) in a year prior to the years in your analysis, then the actual excess out-of-pocket cash happened in the past. How could an inventory write-down be ‘non-cash’? Your account officer could be on the right track, if it were not for the escalating amounts. Generally you will see the adjustment/write-down either in COGS, if relatively small, or as an income statement operating expense if larger. If the inventory can be bought today for substantially less than what it cost when purchased, the write-down is necessary to reflect that loss in value. Otherwise inventory will be artificially high, and the profitability won’t reflect the loss. When they cannot sell inventory, they have to write it down. Inventory is typically written down for two reasons: So it is always true that noticing significant increases or decreases in inventory balances can give you a different view of the cash-flow impact of COGS. Only if inventory levels are steady beginning and end does that simplifying assumption hold water. There is always beginning inventory and ending inventory. We make a simplifying assumption that COGS is cash flow out during the year, but that is not true. Then I’ll run down the write-down of inventory and the questions I’d ask about this particular deal. My initial reaction is YIKES! Why all the write-downs? First, let me address the simplifying assumption we make about COGS in general that does not dove-tail precisely with timing of cash outflow. The account officer is asking us to add those items back to cash available to service debt each year. When completing spreads, we worked this adjustment into COGS as presented on the financial statements.
I am looking at four years of company-prepared financial statements that report an adjustment to inventory each year.
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