![]() 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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