Hello,
I am reading the following sentences:
Aggressive revenue recognition practices typically result in an increase in receivables—which reduces operating cash flow. Another common indicator of aggressive revenue recognition is an increase in inventories (and hence a cash outflow) when sham sales are reversed (i.e., treated as returns from customers).
My questions is why sham sales reviersal would result into an incesae in inventories and hence a cash outflow?
Thanks for you guys
Cheers
Inventories are asset which are meant for sale or ready for sale. Since its a sales return it could not be added to inventory.
so from what you’ve said, the customer returns are treated as unsold product and lie in company’s stock. Eg - retail companies who face a problem of numerous customer returns which leads to a lot of unsold goods and thereby bring down their inventory turnover ratio as cash is still locked up in the unsold product or inventory.
The reason its a cash outflow is
as a company you will return the money you had initially received from the customers
.