Assume inventory write-downs are reported as part of cost of sales. Based on the previous excerpts,…

The following excerpts commenting on inventory management are from the Volvo Group Annual Report, 2008:

From the CEO Comment: “In a declining economy, it is extremely important to act quickly to reduce the Group’s cost level and ensure we do not build inventories, since large inventories generally lead to pressure on prices.”. . .“During the second half of the year, we implemented sharp production cutbacks to lower inventories of new trucks and construction equipment as part of efforts to maintain our product prices, which represent one of the most important factors in securing favorable profitability in the future. We have been successful in these efforts. During the fourth quarter, inventories of new trucks declined 13% and of new construction equipment by 19%. During the beginning of 2009, we have continued to work diligently and focused to reduce inventories to the new, lower levels of demand that prevail in most of our markets, and for most of our products.”

From the Board of Directors’ Report 2008: “Inventory reduction contributed to positive operating cash flow of SEK 1.8 billion in Industrial Operations.”. . .“The value of inventories increased during 2008 by SEK 11.4 billion. Adjusted for currency changes, the increase amounted to SEK 5.8 billion. The increase is mainly related to the truck operations and to construction equipment and is an effect of the rapidly weakening demand during the second half of the year.”. . .“In order to reduce the capital tied-up in inventory, a number of shutdown days in production were carried out during the end of year. Measures aimed at selling primarily trucks and construction equipment in inventory were prioritized. These measures have continued during the beginning of 2009.” and “Overcapacity within the industry can occur if there is a lack of demand, potentially leading to increased price pressure.”

From Business Areas 2008 (Ambitions 2009): “Execute on cost reduction and adjust production to ensure inventory levels in line with demand.”

Assume inventory write-downs are reported as part of cost of sales. Based on the previous excerpts, discuss the anticipated direction of the following for 2009 compared to 2008:

1. Inventory carrying amounts

2. Inventory turnover ratio

3. Sales

4. Gross profit margin

5. Return on assets

6. Current ratio

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