Can inventory as per revised schedule VI be classified as non-current asset?
Can we classify the inventory as non-current asset in revised schedule VI?
I know its a current asset since its consumed withing operating cycle.
What are the situations where management can classify it as Non-Current Asset?
We need to understand the concept of operating cycle period. For normal companies it is generally assumed to be 365 days. hoever, for companies undertaking big projects like aircraft building, liquor manufacturing, construction of warfare equipments etc, operating cycle needs to be calculated as per the situation prevailing in the industry
First lets' understand the following terms :-
DSI - days sales inventory - no of days taken to convert inventory into sales
DSO - days sales outstanding - no of days taken to convert recievables into cash after their creation
DPO - days payable outstnading -Credit period by supliers
operating cycle = DSI+DSO-DPO
Assume the following
Particulars No of days
Net operating cycle 470
Here we can see, the Operating cycle period for the company is 470 days. However , the DSI is 500 days, so to the extent of 30 days , we can say there is some inventory held by the company which is beyond the operating cycle adn can be converted to cash only after 470days. Hence, can be classified as Non-Current to that extent.
The same analogy can be applied to trade recievable also