Some Troubled Firms Write Down Inventory To Boost Earnings Following a company's quarterly cash flow can give clues as to its health.(LEADERS & SUCCESS)(MANAGING A SUCCESSFUL COMPANY)

Byline: MURRAY COLEMAN

When a company reports inventory losses, investors can find themselves taking a financial bath.

"Companies without good internal cost controls can get stuck with a lot of wasted inventory," said Tullus Miller, a partner at consultant Grant Thornton LLP. "If it happens unexpectedly, that can hurt management as well as investors."

A case in point is Cisco Systems Inc. Last year, the network gear maker surprised investors and analysts by writing off $2.2 billion of inventory in its April quarter.

Also taking big inventory write-downs in different quarters last year were Nortel Networks Corp. ($650 million) and JDS Uniphase ($250 million).

Investors should look for signs when a company decides to write down inventory, says Edward Ketz, associate professor of accounting at Pennsylvania State University.

"The key point is that by overstating your inventory loss, you increase net income," he said. "In effect, you're reducing the cost of goods sold. If a company's in trouble, that might be a good way to hide things."