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Vivek Sahay DSMB 710

Book Review Assessment The ONLY Investment guide youll EVER Need: Andrew Tobias

INVENTORY

Includes raw materials, work-in-process goods and finished products for sale
intended to make profit.
For example, in a book selling company, all the books on the shelf that need to be
sent across as and when a customer places the order will be a part of the
inventory.
Key component in calculation Cost of Goods Sold*
One of the factors that drives profit, total assets and even tax liability
Indicative of the health of the industry (for example: inventory turnover ratio)

* Cost of Goods Sold = (Beginning Inventory + Purchases) - Ending Inventory
For example:
As on December 31st 2013
(Millions of dollars) 2013 2012 2011
Raw Materials $3,573.00 $3,766.00 $2,766.00
Work-in-process $2,920.00 $2,959.00 $1,483.00
Finished Goods $8,767.00 $7,562.00 $5,098.00
Supplies $287.00 $257.00 $240.00
TOTAL $15,547.00 $14,544.00 $9,587.00

Measuring Inventories

1. LIFO Last In First Out
a. Earliest goods purchased are the first to be sold.
b. Parallels the actual physical flow of merchandise.
c. The costs of the earliest goods purchased are the first to be recognized in
determining cost of goods sold.
2. FIFO First In First Out
a. Latest goods purchased are the first to be sold.
b. Costs of the latest goods purchased are the first to be recognized in determining
cost of goods sold.
3. Average Cost
a. Allocates the cost of goods available for sale on the basis of the weighted-average
unit cost incurred.
b. Assumes that goods are similar in nature

Vivek Sahay DSMB 710

Book Review Assessment The ONLY Investment guide youll EVER Need: Andrew Tobias

Benefits
1. Fulfills anticipated increase in demand
a. Buffered stock helps meet any uncertain rise in demand from the retailers.
b. Material manager expects prices of materials to rise in near future which will rise
the cost of good sold and lower the profit. So he purchases stock at lower prices
2. Advantage of price breaks for making bulk orders
a. Suppliers offer discounted price on raw materials when a manufacturer makes
bulk orders, which will lower the cost of goods sold.
b. Transportation cost also gets shared and spread across
3. Can be used as a collateral to obtain financing in some cases
a. Financial institutions often give short-term or long-term loans (liability) treating
inventory as a collateral for manufacturers with good credit history

Risks
1. Storage Cost
a. According to the volume of the stock we may need larger space and thereby
increased storage cost of inventory (overhead costs).
b. Storage Cost = cost of warehouse rental + cost of staffing + maintenance cost
2. Deterioration and Obsolescence
a. Products such computers and phones get obsolete in terms of technology hence over
stocking would result in loss of inventory (short-term asset).
b. Products such as dairy have smaller shelf life and hence the product may deteriorate
and lose the inventory value if they are not moved quickly
3. Fluctuation in demand
c. If demand in market fluctuates then the finished product will not yield the expected
value and the sale price will be lower so is the profit margin.

Action Steps

Inventory Manager: Carefully analyze the goods in hand and report (periodical review) to
both the production team as well as sales team so that the demand and supply could be
handled with respect to available inventory. At the same time should have safety stock so
that variation in demand could be met.
COO: Understand the market, study its financial parameters and assess any discrepancy in
demand and supply. Obsolete inventories hit the cost most. A COO who is well informed
about the demand of the market will never let his inventory unsold before it turns obsolete.
CAO: Ensure that the supply chain is smooth and effective. Also, from production strategy
the executives should look into factors such as production leveling (both by product and by
volume)
Vivek Sahay DSMB 710

Book Review Assessment The ONLY Investment guide youll EVER Need: Andrew Tobias

DEPRICIATION

Reduction in financial value of an asset with respect to time
Owes to wear & tear, obsolescence or age
Doesnt apply to land and unsold property (apartments)

Calculating Depreciation (Straight Line Method)

Cost of asset Estimated residual value
Depreciation = ---------------------------------------------------------
Estimated Useful Economic Life

Example: Cost of asset = $1700
Salvage value = $100
Estimated useful life = 8 years

1700 100
Thus, Depreciation = ------------------- = $ 200
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Benefits
1. Non Cash Expense
a. Helps to get deduction in tax if one wants to buy assets in current year
2. Asset valuation
a. Helps companies to report correct value of their assets
3. Ascertainment of real profits
a. Depreciation is treated as revenue expenses and are debited to profit and loss
account which helps one to get the right picture of real profits.

Risks
1. Discrepancy between real world value and mathematics Sometimes due to
certain circumstances the depreciation is faster than what is expected and so
the real world depreciated value is way different than what an accountant
would expect.
For example: A hospital bought an X-Ray machine for $100,000 with an
average life of 7 years. If there is a mechanical failure or a flood then the
hospital will incur huge loss due to depreciation.
Vivek Sahay DSMB 710

Book Review Assessment The ONLY Investment guide youll EVER Need: Andrew Tobias
2. Fixed depreciation irrespective of seasonal usage In some cases some
machines are used more in a particular season and are sparingly used or not
used in other seasons. However, the depreciation doesnt factor not in use
period of the asset.

Action Steps

Accounting Manager: Carefully analyze the usability of the asset before assigning the
depreciation. If the depreciation is calculated appropriately then the insurance coverage in
case of any major issues will help get the actual value at that point of time.
CAO: Should have flexibility in terms of evaluation method and same depreciation formula
should not be applied to all assets. For example machineries are heavily used and they
should be calculated for depreciation differently than assets such as furniture.
CEO: Should ensure that depreciation calculation is done impartially. So for example, a third
party can be consulted who can give a non-biased depreciation value.

PREFERRED STOCKS so called because their dividend must be paid in full before any
dividend on common stock may be paid.

Act like bonds
Get fixed payout each year
Has the characteristic of both debt (which investors get in form of fixed
dividends) and equity, which has the potential to appreciate.

ASSETS = LIABILITIES + STOCKS

In case of liquidation the debt is paid first, with whatever is left the preferred stock
holders will get their portion and after that if something is left then common stock
holders get their portion.


Benefits
Higher claim on the assets and earnings than the common stock
Has a dividend which is paid out before the dividends are paid out to common
stock holder
The dividends are not susceptible to expenses related to tax deduction
Vivek Sahay DSMB 710

Book Review Assessment The ONLY Investment guide youll EVER Need: Andrew Tobias

Risk
Difficult to sell in market because investors have to wait for a longer period of time
Has a dividend which is paid out before the dividends are paid out to common
stock holder


Action Steps

Investor: In the book The ONLY investment guide youll ever need, Andrew Tobias has
mentioned that the stockholders never have voting rights and hence an investor has very
limited rights. Thus, investor should very carefully look into the pros and cons, understand
the asset and liability of the company they are investing in and should be clear about the
companies growth prospects.
CAO: In the book The ONLY investment guide youll ever need, Andrew Tobias has
mentioned that
CEO: Should ensure that depreciation calculation is done impartially. So for example, a third
party can be consulted who can give a non-biased depreciation value.

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