Why reports of the decline of the PS3 have been grossly exaggerated.

[NJ5]

Squilliam said:

NJ5 said:

@Squilliam: On second thought, I don't understand why stocked inventory is important for this debate. That stock was built in the past so its production cost was already written off (or converted into an asset valued at the price they'll sell it for). In conclusion, its cost of production doesn't affect future earnings. Price and currency drops do, though, as they reduce the asset's value.

 

Because theres often a 6 month lag between production and sale for goods such as TVs and Stereos etc. A higher cost of production and lower earnings due to currency fluxuations are a bad combination. The cost hasn't been accounted for because inventory is considered an asset rather than an expense. When an asset reduces in value, such as depreciations or a writedown its considered an expense.

A TV produced this week will cost a lot less, as the LCD prices, material prices, shipping prices etc are all dropping.

 

That doesn't really change my point.

Scenario 1

In January, a company builds a TV at a cost of $600, and converts it to an inventory asset valued at $700, expecting to sell it later for that price. That's a net increase of $100 in the company's value.

Later in June, the company sells this TV for $700 in cash and decreases its inventory value by $700 (since it's gone). The company's value doesn't change during this month.

Scenario 2 (differences bolded)

In January, a company builds a TV at a cost of $500, and converts it to an inventory asset valued at $700, expecting to sell it later for that price. That's a net increase of $200 in the company's value.

Later in June, the company sells this TV for $600 in cash (due to a slowing economy, currency losses or whatever) and decreases its inventory value by $700. The company's value decreases by $100.

In both scenarios, June's earnings are unaffected by how much production used to cost in January. The only reason why June's earnings are different in the two scenarios is the lower sales price.

Therefore, the future earnings of Panasonic aren't negatively affected by the formerly high cost of raw materials. Their forecast of negative profits is therefore due to lower sales volume/price and currency losses, which was my original point.