This case extracts information from the annual report of Cadbury plc to show how the company explains its management of current assets.

The cost of inventories recognized as an expense for the period ended 31 December 2008 total £2,870 million (2007: £2,504 million).

Accounting policy note (r) Inventories Inventories are recorded at the lower of average cost and estimated net realisable value. Cost comprises direct material and labour costs together with the relevant factory overheads (including depreciation) on the basis of normal activity levels. Amounts are removed from inventory based on the average value of the items of inventory removed.

Accounting policy note – transactional exposures The Group is exposed to changes in prices of its raw materials, certain of which are subject to potential short and long-term fluctuations. In respect of such commodities the Group enters into derivative contracts in order to provide a stable cost base for marketing finished products. The use of commodity derivative contracts enables the Group to obtain the benefit of guaranteed contract performance on firm priced contracts offered by banks, the exchanges and their clearing houses. In principle these derivatives may qualify as ‘cash flow hedges’ of future forecast transactions. To the extent that the hedge is deemed effective, the movement in the fair value of the derivative would be deferred in equity and released to the income statement as the cash flows relating to the underlying transactions are incurred.

Working with our suppliers We use a wide range of raw materials in manufacturing our confectionery products, the main ones being cocoa beans, sugar and other sweeteners (including polyols and artificial sweeteners such as aspartame), dairy products (including fresh milk), gum base, fruit and nuts. Our supplier base is diverse. Our sustainability review sets out some of the initiatives we use to ensure ethical and sustainable sourcing, particularly through our Cadbury Cocoa Partnership. More details can be found online [website reference]. In addition, our supply chain team develops individual strategies, audit programmers and development plans to help manage risk within our supply base.

Discussion points 

1 What are the proportions of raw materials, work in progress and finished goods inventories?
2 How does the company deal with the volatile prices of cocoa and sugar?

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Current assets: balance sheets at 31 December 2008 Note 2008 m 19 20 27 Inventories Short-term investments Trade and other receivables Tax recoverable Cash and cash equivalents Derivative financial instruments Annual report 2008, p. 84. 19. Inventories Raw materials and consumables Work in progress Finished goods and goods for resale 767 247 1,067 35 251 268 2,635 2008 m 228 92 447 767 2007 m 821 2 1,197 41 493 46 2,600 2007 m 255 69 497 821