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Time Management Goals
Inventories are a component of the
firm's working capital and, as such, represent a current asset. Some
characteristics are important in the broad context of working
capital management, along with the
inventory management including:
- The Current Asset: It is assumed that inventories will be
converted to cash in the current accounting cycle, which is
normally, one year. In some cases, this is not entirely true, for
example, a vintner may require that the wine be aged in casks or
bottles for many years. In spite of these and similar problems, we
will view all inventories as being convertible into cash in a single
year.
- The Level of Liquidity: Inventories are viewed as a source of
near-all cash. For most products, this description is accurate. At
the same time, most firms hold some slow-moving items that may not
be sold for a long time. With economic slowdowns or changes in the
market for goods, the prospects for sale of entire product lines may
be diminished. In these cases, the liquidity aspects of inventories
become highly important to the manager of working capital. At a
minimum, the analyst must recognize that inventories are the least
liquid of current assets. For firms with highly uncertain operating
environments, the analyst must discount the liquidity value of
inventories significantly.
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