Inventory Problems for General Mills General Mills’s 1994 annual report cited “disappointing” financial results. The poor results were believed to be the result of two major problems in the cereal segment of the business: promotional activities and inventories. The following is an excerpt from the 1994 annual report:

The second major problem affecting Big G cereals and 1994 results was the improper substitution of an unregistered pesticide during the year by a licensed independent contractor who treated part of the company’s raw oat supply. While the substitution did not present any consumer health hazard, it did represent a regulatory violation. We voluntarily halted shipments of affected oat-containing products and did not seek permission to ship affected inventories because the process required to secure regulatory approval proved so lengthy, it would exceed the product age limits we employ to ensure freshness in the market. Production and shipment of our oat cereals was interrupted for a month-long period in June and July. By late July, the company resumed full production and shipment of oat-containing products.

a. What effect might General Mills’s inventory problem have had on its income statement?

b. What effect might the inventory problem have had on General Mills’s balance sheet?

c. How would you account for this inventory problem?