Financial Modeling Case - looking for best practice - Change in Inventory on Income Statement

marcinprox's picture
Rank: Chimp | 8

Hi Simians,

I am looking for best practice about Income Statement position "change in inventory". This is typical for production companies, when they sell products made in period before, and there is impossible to relate COGS in current period to them. The question is, what are typical assumptions with this position?
Currently, I am modeling 2 companies where this position historically is significant - like 120m sales include 15m change in inventory.

My ideas are:
a) Assume that in future periods change in inventory will be 0 because company always wants to produce that much as much can sell
b) Take proportion from previous periods and assume future sales will look the same (15/120).
c) Calculate this position as an accounting rule (this usually brings different result than historically - like 2/120)

*Sorry for my CEE English style

Comments (3)

Aug 21, 2017

Best practice is to calculate inventory days (Inv*365/COGS) and assume they are going to be constant or higher/lower. I think it is common for a company to sell a product produced in a previous period so I do not see what's the problem with this

Aug 21, 2017

Thank you for response.

This position appears when production company shows all costs in financial statement - typically companies only show costs dedicated to sold production. In that case, reasons of change in inventory are also: consolidation, inventory movement inside the group, or changing status of inventory.

The problem is companies rarely show this position so investors may have doubts about it. Another thing, if this position is significant, assumption can highly determine the result.

To be clear, I know how to plan Inventory in Balance Sheet. I have problem with "change in inventory" in Income Statement only - I look for most common rule in this case, I know its not so usual situation.

Anyway, thanks for response again!

Aug 21, 2017