FINANCIAL ACCOUNTING PROJECT

By Group 4

- Jatin Arya (14)

- Kabeer Singh (16)
- Kushagra Mittal (18)
- Mohit Gulyani (20)
- Preyas Patel (22)

Under the guidance of Prof Anand Sharma

And Prof Sandeep Goel

Ques 1) Prepare an analysis of holding period for various categories of inventories.

Analysis of holding periods: From the inventory analysis of various companies across
sectors, it can be seen that the holding period of raw materials is decreasing for most of the
companies, since 2006. For example, in Tata, this period has come down from 107 days to
less than a month. This is a healthy sign for companies, because this decrease also implies
the decrease in cost of holding the inventory of raw materials. This is also true for Maruti
Suzuki, Mahindra and TVS motors. However, for Hindustan motors, this period has almost
doubled over that period.
It can be clearly seen from COGS that Tata’s sales is growing very fast (363% increase
over the period), in contrast with HM (41%). HM needed to store raw material for longer
period due to its poor performance. In other words, there is a strong correlation between
performances of companies and average raw material holding period. However, TVS
managed to decrease its raw material holding time, in spite of poor sales growth rate (29%).
Similar conclusions can be made by analyzing the turnover of semi-finished and finished
goods. It can be seen that holding periods of finished and semi finished goods is declining for
the four healthy companies. The only exception is rising inventory of Tata for semi finished
goods. This can be explained as follows:
During the period of analysis (2006-10), Tata was working on ‘Nano’ project. It
produced large quantities of semi-finished goods, ready to be converted into final product as
soon as the permission is granted for the product. Now that the car is being produced and
launched in the market, this holding period is expected to go down in a few years.

Ques 2) Do you see any industry patterns?

INDUSTRY PATTERNS
The Automobile Industry is one of the biggest industries in India. The industry has observed
certain pattern shifts in terms of its Inventory Management during the previous years.
It has been observed that the successful companies like Tata Motors, Maruti Suzuki etc are
focusing on:

INCREASING DECREASING
Raw Material Turnover Raw Material Holding
Semi-Finished Goods Turnover Semi-Finished Goods Holding
Finished Goods Turnover Finished Goods Holding

This shift helps them in achieving:

 Greater Cash in Hand

 Lower risk of obsolescence
 Reduced interest and storage charges
 Efficient Inventory Management
 However these can be classified as characteristics of only successful companies.
Unsuccessful ones like Hindustan motors have not been able to implement these strategies
properly since their sales figures are very poor and their COGS hasn’t seen much
improvement since 2006.

It has been observed that the companies which have been able to plan and manage their
inventories well have seen increased COGS. On the other hand, companies like TVS saw
declined sales in the year 2008 attributing to their poor Inventory management.

For efficient and profitable business, production-planning department of various companies

across the industry support decision making on production schedule, -mix and inventory
management on a day-to-day basis.

Ques 3) Explain any trends in holding period.

It has been observed that the companies like Maruti, Mahindra and TVS have decreased
their holding period and trying to save on inventory costs. However, the graph of TATA
shows an abrupt trend with Raw Material and semi finished goods inventory holding increasing
since 2006 and huge decline in 2009. This can be attributed to the launch of ‘Nano’. It is
prevalent that TATA was procuring raw material and saving the semi-finished goods and in
2009 converted them into a finished product.

Ques 4) Why is your study important in analyzing financial statements?

Our study is on Inventory Management which is very important for analyzing financial
statements. Inventories represent the resources of the firm invested for the purpose of
facilitating operations. Excess inventory represents wasteful use of resources. The need of
holding inventory is also influenced by the availability of goods, time taken for deliverables,
seasonal nature of business etc. Our study has made us analyze all this parameters while
solving the case.