Need Help With Accounting Questions?
Posted by admin | Posted in Blogging | Posted on 17-10-2009
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Many high-technology companies, like Nortel Networks, Micron Technology and JDS Uniphase, have written down massive amounts of their inventory. For example, Nortel Networks revalued some of its inventory parts at $0, though the inventory initially cost Nortel $650 million.
Companies are required to report whether they write off the cost value (or book value) or their inventory even if they do not dispose of the inventory. Later on, they may sell this inventory but are not required to report the sale for cash of previously “worthless” inventory. The effect may be that in future years, when the inventory is sold, profits are overstated.
Also in the article, JDS Uniphase said it will write off $250 million of its inventory but promised to disclose any future sale. On the other hand, Micron Technology, which wrote down $260 million, won’t disclose any future sale (Krantz, 2001). Should the Securities and Exchange Commission do anything? Why?
Yes. One purpose of the SEC is to ensure accurate financial reporting. If a company gets revenue from a sale of previously written off inventory, their income will appear overstated, and that is not accurate for the period in question.
That inaccuracy could turn a losing period into a profit period and mislead investors.
It would seem that public companies have an obligation to reveal their financial affairs to ALL their stock holders. One gets the impression that large holders are privy to info that you and I aren’t. That’s why.