Inventory Change Decoded: How It Impacts COGS & Profitability in Financial Statements

Vinu: Manu, what does a positive or negative change in inventory mean in financial statements?

Manu:

In financial statements, the change in inventory is calculated as:

Change in Inventory

=

Opening Stock

−

Closing Stock

Change in Inventory=Opening Stock−Closing Stock

Now, a positive change means Opening Stock > Closing Stock. This happens when the company has sold more goods than it produced, which increases COGS and reduces gross profit.

Vinu: Can you give an example of a positive change?

Manu:

Sure! For HUL (FY 2022-23):

Opening Stock: ₹5,000 crores

Closing Stock: ₹4,000 crores

Change in Inventory = ₹1,000 crores (positive change)

Here, COGS increases, reducing gross profit because more goods were sold than produced.

Vinu: What about a negative change in inventory?

Manu: A negative change occurs when Opening Stock < Closing Stock, meaning the company produced or purchased more than it sold. This reduces COGS, increasing gross profit.

Vinu: Can you give an example of a negative change?

Manu:

For Maruti Suzuki (FY 2022-23):

Opening Stock: ₹2,000 crores

Closing Stock: ₹2,500 crores

Change in Inventory = -₹500 crores (negative change)

Here, COGS decreases, boosting gross profit because they produced more than sold.

Vinu: Got it! Positive change increases COGS and reduces profit, while negative change reduces COGS and increases profit.

Manu: Exactly, Vinu! Understanding this helps analyze how inventory affects profitability.

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