Suddenly Investors In Retail Need To Learn More About Accounting

More and more evidence is piling up.

The back half of the bullwhip effect, in which businesses struggle to match changes in demand from consumers, has been seen in recent earnings from retailers. In this case, companies might have overordered to make sure they have enough for everyone. Stores are left with an oversupply of goods when famine strikes.

So what does it actually mean when a big box store has a lot more inventory?Recall that companies are ultimately represented by bundles of carefully chosen numbers known as balance sheets and earnings statements. While we can argue what those are supposed to represent exactly, we know that they’re subject to accounting rules and conventions. That means in order to understand the consequences of inventory builds, investors are going to have to become far more familiar with inventory accounting.

There are three major methods.