Retailers as well as manufacturers can apply just-in-time (JIT) to their invento

Question

Retailers as well as manufacturers can apply just-in-time (JIT) to their inventory management. Both Research I n Motion and Apple want to know the impact of a JIT inventory system for their operating cash flows. Review each company's statement of cash flows in Appendix A to answer the following. (For RIM. also review Note 16.)

Required

1.Identify the impact on operating cash flows (increase or decrease) for changes in inventory levels (increase or decrease) for both companies for each of the three most recent years.

2.What impact would a JIT inventory system have on both RIM's and Apple's operating income? Link the answer to your response for part l.

3.Would the move to a JIT system have a one-time or recurring impact on operating cash How?

Explanation / Answer

1

Revaluation of inventory has no net effect on the cashflow statement as there has been no movement in cash.

If the value of inventory is increased, the debit entry to inventory revaluation is negated by the credit entry to the revaluation reserve / shareholders' funds.

If the value of inventory is decreased (more common), the credit entry to inventory writedown is negated by the debit entry as an expense or cost of sales item through the "statement of financial position" to retained earnings / shareholders' funds.

Treatment and disclosure of course would vary depending on the materiality, timing, accounting standards applicable to the jurisdiction and legislative / regulatory requirements with which the entity is obliged to comply.

2

The way you manage your inventory has something to do with how much cash your business generates on a daily basis. Inventory can be used to your advantage, but ignorance about how inventory management can affect the movement of cash into or out of your company will definitely be a disadvantage to your business.

3

Inventory refers to assets that are intended for sale or are in the process of being manufactured for sale. The relationship between inventory and cash is largely determined by your choice of inventory accounting method, the level of inventory you choose to stock, inventory cost and the saleability of your stocks. Efficient inventory management can boost your cash flow, while poor management can cause cash flow problem

4

Manufacturers and distributors need to have inventory available to ensure a steady flow of goods to producers and consumers. Selling inventory also keeps a steady flow of capital coming into your business. However, handling and storing materials can be costly.

When considering the costs of housing inventory, it is important to distinguish between value added activities and non-value added activities.

The cost of warehousing inventory is a non-value added activity. Upon receiving merchandise, your customer’s only concern is, “Does it work and is it going to perform the function for which it was purchased?â€

Just-in-time (JIT) purchasing and just-in-time production help combat these undesirable, non-value added inventory costs. These demand-pull inventory systems are applied by requiring that raw materials arrive in your warehouse exactly as they are needed for production or distribution. The goal of JIT systems is to eliminate all non-value added activities.

JIT purchasing and productions systems offer many advantages over traditional systems, such as:

The primary benefit of a JIT purchasing or production system is the reduction of inventory … ideally to zero. Reducing inventory will decrease the cost of handling and storing materials. It will also free up space that can be used for more cost effective activities.

In order to successfully implement such a plan, it is critical that you have strong relationships with your suppliers.

JIT requires manufacturers and distributors to shift the activity of inspecting for defective products to your suppliers. As products are added to your inventory just when they are needed, it is essential that they are shipped in good working order.

Shifting inspection activities helps to reduce your costs of inspecting and sending back defective inventory. If suppliers do not deliver defect-free materials on time, stockouts and customer returns will occur and they will be more pronounced under the JIT system, since safe levels of inventory are not maintained. This is why building strong relationships and increasing communication with your suppliers and customers is so important.

Implementing a just-in-time inventory system, and identifying and reducing non-value activities, can save you money and time.

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