Inventory

Goods held for sale, plus the raw materials and work in progress that will become them. It is measured at the lower of cost and net realisable value, the expected selling price less the costs to complete and sell, so a write-down is needed when that falls below cost. Raw materials are not written down if the finished goods they go into will still sell at or above cost. US GAAP uses the same test for most inventory but keeps lower of cost or market for stock valued by LIFO or the retail method.

The distributor with ₹3,900 crore of cost of goods sold and ₹780 crore of inventory is holding about 73 days of stock.

Inventory is the most judgement-laden line on the balance sheet. Deciding that slow-moving stock is still worth its cost keeps profit high this year and creates a larger write-down later. Rising inventory days alongside rising revenue is the classic setup for that write-down.

The notes show raw materials and work in progress separately from finished goods. That split is worth ten seconds of attention because the three mean different things. Raw material building up is a purchasing decision, sometimes a sensible one ahead of a price rise. Work in progress building up points at a production bottleneck. Finished goods building up is the one that matters most, because it means the company made things that nobody has bought, and it's the component that leads a demand disappointment by a quarter or two.

For a pharmaceutical or fashion business, ask how much of the stock will still be saleable in twelve months.