Inventories and Trade Receivables

Stores & spares of ` 14.07 crore. Raw materials of ` 15.57 crore, which includes goods-in-transit and stock lying at port of ` 6.83 crore.

By-product of ` 11.20 crore.

All the above 3 items of the inventories are unusual in nature, in as much as stores & spare parts inventory is close to 27% of the total inventory in FY 2021 and 20% in FY 2020. Goods-in-transit and stock lying at port is equivalent to 13% in FY 2021 which was equivalent to 30% in FY 2020. Similarly, by-product is equivalent to 21% in FY 2021 and 25% in FY 2020 of the total inventory.

concerned, which inter alia included goods-in-transit and stock lying at in-transit and stock lying at port, the major item naturally pertains to amount of raw material in transit at the end of the year. disclosure) has been provided in the notes on account, as per Box 52.

BOX 52

Analysis

Since the stock lying at the port forms part of raw materials, the total raw ` 12.61 crore as against which stock claimed at port was of ` 6.83 crore and in FY 2010, against the total import of raw materials of ` 7.43 crore, the raw materials claimed as lying at port was of ` 21.45 crore.

( ii

)

( has been claimed as lying at port. It was found that the said inventory lying at port was only on paper and did not exist. to be reported in the CARO report (please refer chapter 30 of key#4), the

Please note that while imports are of ` 12.61 crore and ` 7.43 crore in of ` 6.83 crore and ` 21.45 crore.

BOX 53 a) As explained to us, inventories (excluding Goods in Transit and Goods lying at

Analysis

Therefore, the auditor in the CARO report has clearly stated that stock

On the basis of these disclosures in the balance sheet the important facts emerges are -

(a

( b) There was no corresponding import of the raw material

( c - of drawing power. To their utmost surprise, no such stock was found

CHAPTER 15 in the stock statement as well as in the balance sheet, for the purpose of of stores & spares and level of inventory, as given in Box 54 below:

From the perusal of the above details of stores & spares, it is absolutely clear that yearly purchases are in the range of ` 3.76 crore to ` 5.60 ` 3.26 crore to ` 8.46 crore. With these facts, how could the inventory of ` in the books for the purpose of drawing power, as stores & spares is

The actual facts as found are that the stores & spares have been con-

Case Analysis-21

The most important part of any balance sheet analysis is to find out early warning signs, so that corrective action can be taken before accounts turned into stress and then non-performing assets. The analysis of inventories and trade receivables is a crucial part of the analysis of a balance sheet to unlock secrets. The analysis of the inventories and trade receivables is always based on the trend. The trend is ascertained with regard to level of inventories and trade receivables. The principle is to find: What is the average holding period of raw material, workin-progress, finished goods, stock-in-trade, in terms of month and similarly, in the case of trade receivables, how many months of sales is outstanding?

To understand the issue properly, mark how the level of inventory and trade receivables are gradually “built up” and thereafter, all issues such as “inventory includes slow moving, non-moving, obsolete stock” and/or “debtor’s balance is subject to confirmation” etc., come up after certain period of time. This phase comprising of several years can be termed as:

- Base phase;

- Built-up phase; which is a good sign. to ` 168 crore which is also about 56% income. -

- Stress phase.

Initial period (base phase) is the period comprising 3-4 years wherein a rosy picture is depicted, built-up phase is after the initial period comprising another 2-4 years wherein the inventory level and debtor’s level is gradually built up to show progress for the purpose of better financial position, good current ratio, for better drawing power etc. Then comes the last phase (stress) in which the bubble is burst.

To explain this important issue, which is found to be commonly used, I have selected a case analysis of a company, comprising of 6 years (from FY 12 to FY 17), wherein, all the 3 phases are found with respect to inventories and trade receivables.

This case analysis pertains to a leading integrated multi-product textile company, manufacturing knitted garments, terry towels, fabric and various kinds of yarn. In the Box 55, the profit & loss statement of the year ended 31st March, 2013 is provided, to give the position of the company for the year 31st March, 2012 and 31st March, 2013, being base-phase.

` cial statement of this case analysis, the following important facts were

CHAPTER 15

Inventories and Trade Receivables

In FY 2012-13, the company issued 22 crore equity shares of the face value of ` 10 per share consequent to Global Depository Receipts (GDRs) for ` 220 crore.

Secured term loan from 17 banks was at ` 1,511 crore as on 31st March, 2012, which has increased to ` 1,572 crore as on 31st March, 2013.

Another secured loan of ` 464 crore has been obtained from banks during the FY 2013, as working capital loan. As a result, the working capital loan which was at ` 802 crore as on 31st March, 2012 has increased to ` 1,266 crore as on 31st March, 2013.

` 1,546 crore as on 31st March, 2012 has increased to ` 2,847 crore as on 31st March, 2013.

` 1,300

` 1,300 crore includes CWIP capitalized of ` 1,275 crore.

` 381 crore is made in FY 2013.

56, the details of inventories as per note-16 and trade receivables as per note-17 of the Balance Sheet is given.

CHAPTER 15

Note 17: TRADE RECEIVABLES

(Unsecured, considered good)

(

) Outstanding for a period exceeding six months from the date they are due for payment

As at 31.03.2013 (in ` ) at 31.03.2012 (in ` )

For the purpose of analysis of inventories and trade receivables, it is -

Box 57. Base

BOX 57

NOTE 21: REVENUE FROM OPERATIONS FOR THE YEAR 31ST MARCH, 2013

Analysis inventories and trade receivables of Base Phase of case analysis-21: the sales of products include traded sales. The said traded sales from ` 362 crore to ` 865 crore. Therefore, so far as manufacturing sales is concerned the same has increased from ` 1,649 crore to ` 2,250 crore in FY 2013. The rise in manufacturing sales is only 36% as against overall increase in sales of 55%.

The analysis of the inventory in terms of holding period is as under: (` in crore)