JIT's Impact on a Firm's Financial Statements

Many corporations have a large investment in inventory, and at the same time they must be adaptive to cope with increasingly volatile environments. One way of releasing resources and stimulating productive reorganization is to introduce a just‐in‐time inventory system. This article identifies the various cash flow and financial statement consequences of this action in both the short and longer terms. It is argued that the overall value of inventory will decrease, cash will show an upward trend, accounts receivable and plant assets will increase, accounts payable will rise, additional equity or long‐term debt will be issued, income taxes payable will rise after an initial reduction, and retained earnings will increase. Moreover, once any holding gain effect has run its course, the consequences of improved productivity, cost reduction, and production, coupled with revenue growth, will increase net income.