Consolidating inventories;

              Bulletin HASKINS & SELLS 55
Consolidating Inventories
A CASE which recently was the subject
of somewhat prolonged discussion at
one of the Wednesday evening staff con­ferences
has to do with the matter of con­solidating
inventories. The question which
provoked the discussion was: "How should
goods which are finished product to one
company and material to another be com­bined
in consolidations?"
The particular case which gave rise to
the question was one in which various parts
used in the assembly of a musical instrument
were manufactured by various companies
subsidiary to the assembling company.
Many of the parts were of such nature that
they could be, and as a matter of fact were,
sold to companies other than the assem­bling
company. The capital stock of the
subsidiary companies is all owned by the
assembling company. The question of
inter-company profits included in inven­tories
is not involved in the discussion of
this phase of the situation.
The easiest solution is found of course in
putting the inventories together for con­solidated
purposes in mechanical fashion.
In other words, after the inventories of the
separate companies have been set up ac­cording
to material, goods in process, and
finished goods, they are then combined
according to these classes of inventories.
Immediately the objection is raised that
this will not give a true picture of the situa­tion
from the point of view of the con­solidation.
It will not reflect the situation
as it would appear, looking at the manu­facture
of the finished article as a whole.
The reason is that there will be included in
the finished goods caption, automatically,
parts which to an outsider looking at the
enterprize as one concerned with the manu­facture
of a single product would not be
finished goods.
The practical question is that of whether
or not the amounts representing parts in­cluded
in finished goods would be suffi­ciently
large to distort or mislead were such
amounts to be included in the finish goods
caption. Theoretically, in consolidation,
parts are not finished goods. With respect
to individual companies they are finished
goods. They may be sold to customers
outside of the family as readily, as in this
case, to those inside. As a matter of
liquidating value they are as susceptible of
being converted into cash as are the articles
of final product.
So one may argue back and forth on
these questions without coming to a satis­factory
theoretical conclusion. All of which
demonstrates the desirability of being
guided by practicability instead of tied to
pure theory. The practical side of the
question is: How should the matter be pre­sented
so that it will convey the true situa­tion
to "him who runs"? The answer to
the question seems to be found in consoli­dating
the figures mechanically, but setting
out, by way of parenthetical explanation,
in the finished goods caption the amount
representing the finished parts of subsi­diaries
included in the finished goods.