Lately , i have started paying attention to this section in a company’s quarterly results and trying to build my understanding regarding what this means and its implications on company’s performance ? My understanding is this is part of expenses if its positive , this means that company has accounted for the amount towards revenue in previous quarter(s) but now this inventory has not actually been sold or still sitting with the company so its deducted from reported revenue .
is that correct ?What is the implication if this happens frequently ? Does that mean company’s goods/products are facing a slowdon in sales ? if someone could elaborate in simple english , it would be greatly interested . i googled around and found few articles explaining it but found it difficult to get pass through accounting jargon (non-financial background you see).
Since you mentioned quarterly results I presume you are looking at P&L.
You would have seen “raw materials consumed” and an entry under “changes in inventory of finished goods, work in progress and stock in trade”.
Entire raw materials consumed may not pertain to the respective quarter so the com would subtract the balance from expenses. But we do not get to know the exact breakup of this “changes in inventory” in quarterly results. If its all finished goods then the com might be facing problems in selling the same.
The com could be preparing for the next quarter as well. Take Kaveri seed for instance.
As we know the nature of their business of high sales in June (60%+ of annual revenue) and the fact that seed inventory takes time to buildup we can conclude with some surety that the com is preparing for a good June. The Raw materials consumed is 220 Cr but then changes in inventorysubtractedfrom expenses is 179 Cr.
The Annual report will give exact breakup b/w finished goods and others. You can combine this data with the nature of business to read into this. Look at how the inventory behaves with respect to sales over a period of time, if there is unusual change then we need to dig deeper.
Hope this helps
thanks for the detailed explaination . very helpful in improving my understanding on the subject
How to interpret this:
1, Sales revenue in H1 2016 and H1 2017 are almost same with a slight decrease of around 5% - 10% in FY-2017.
2, Change in inventory of finished goods - work in progress and stock in trade became positive for H1 2017. For past many quarters, it was negative.
3. In expenses section, cost of material consumed + Change in inventory of finished goods - work in progress and stock in trade remains almost same with respect to previous year H1 and in line with total revenue.
Is it a positive or negative for a company ?
Since cost of material consumed is reduced to the similar extent of increase in work in progress and stock in trade amount, the total expenses are also almost the same.