Question

Financial comparability between companies:

We are comparing the financial performance of two companies ( Ex Company A versus B)

In the comparison of marketing, inventory, pricing, and revenue, what is it that is misleading about using inventory or gross/aggregated financial values?

Although inventory may be useful in the comparison, why it is preferable to remove it as well as to remove gross revenue data?

Answer 1

Gross revenue includes sale value and taxes,duties, surcharges etc. This parameter unnecessarily bulks up the revenue figures and while comparing 2 different firms the tax and surcharges etc. may be different for the different products the firms sell. Therefore direct comparison is misleading.

Inventory can get valued based on different valuation methods FIFO (first in first out) or LIFO (last in first out). Depending on this the nos may change. Also the some firms use the inventory value as of the last day of the period whereas others use average inventory values. For these reasons its not advised to use this parameter directly.