I Dont Understand This Accounting Information, Can Someone Help Please!!!?
Posted by admin | Posted in Blogging | Posted on 20-10-2009
2
This has to be 1-2 par
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?
The following sentence is WRONG. Check the original for a difference or it’s a typo:
‘Later on, they may sell this inventory but are not required to report the sale for cash of previously “worthless” inventory’<–the ARE required to report the cash as income and since the inventory cost basis is now ZERO, it’s all profit.
Let’s go back to the basics. Inventory is an “expense waiting to happen.” Under normal accounting rules, you postpone the cost of goods sold until you actually sell it. This causes a problem, say, if you have a warehouse of 1990 calendars that nobody wants. If they stay on the books, you never get to deduct the expense. You DID spend the money and unless and until you can claim it, you have higher income/higher taxes now.
So, I go in and announce the 1990 calendars are obsolete. I deem them essentially worthless and adjust the value of ending inventory to zero. My current COGS goes up, my income goes down and I pay less in tax (finally!).
I can toss the calendars in the trash and walk away or I can store a few of the Michael Jackson ones hoping they might become valuable. (I will have overhead in storing the items so I must have excess warehouse space to justify this.) In the event I do get to sell them, I’ll recognize the income then. Since the COGS was recognized earlier, my cost basis is zero and yes, I do inflate my profits, but it’s a risk I’ll happily take.
Gee, Micron is taking a leap. Trying to have their cake and eat it too. Even if the SEC doesn’t comment, the IRS *will.*
Depends, a lot of the companies mentioned are technology companies and it is very possible these inventories have become replaced by a new product or the product is obsolete. If this is the case they may sell them for very little money, but may also not get anything for them.