Is Inventory An Asset?

As the financial crisis continues to dominate the news and the fear of recession looms, many companies have decided that before the entering Chapter 11, they should consider finding a buyer. One local retail company I know decided to take the plunge and was surprised to find several potential suitors. However, that’s where the good news ended.

One potential buyer sent in a consulting firm to perform due diligence; looking at their financials, facilities, manufacturing, employee benefits, labor issues and lastly their inventory. I had read an article on why inventory should not be part of a company’s assets and hadn’t thought about it until I heard about the due diligence that was to be performed.

This retail company had a huge inventory which was naturally listed as assets. However, the due diligence soon found that the inventory was several years old; much of it had been superceded and basically unsaleable. Subsequently the retail company has to decide whether to accept a substantially lower offer for their company or try to ride out the financial storm.