Inventories and Trade Receivables

In the case of trade receivables, the normal credit period is relevant. The trade receivables normally should match the credit period and be of equivalent term. To find out the same, the average monthly sales is worked out on the basis of total sales. On the basis of average monthly sales, how many months of sales is outstanding is worked out and the same needs to be compared with the normal credit period. In case of substantial difference, the reasons thereof need to be ascertained.

The moment the holding period of the inventory or trade receivables is found substantially higher than past trend, or industry practice, it indicates that the inventory may include slow moving/non-moving/obsolete items, and trade receivables may include non-recoverable amounts. In such cases, a detailed analysis and further examination of various facts is required.

The above analysis of holding period in case of inventories and trade receivables is not applicable in the case of seasonal industries. In the case of seasonal industries, the holding period is compared to past trends and industry practice.

Case Analysis-20

This case analysis pertains to a steel manufacturing company situated in Gujarat. In the Balance Sheet as on 31st March, 2021, the details relating to inventories was shown in Schedule 6, as given in Box 50.

For the analysis and unlocking the secrets of inventories, the statement of profit and loss, needs to be looked into. In the Box 51, the profit and loss account of the said company for the said FY 2021 is provided.

From the perusal of the details of inventories (Box 50), it is clear that for FY 2021, the total inventories are ` 52.85 crore, as against ` 71.92 crore in FY 2020. It is further seen that out of the total inventories of ` 52.85 crore in FY 2021, the major part is:

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