Another  useful  check  of  sales  or  income  which  can  also  be
used  in  checking  all  working  capital  requirements,  is  a  com-
parison of  these  accounts  with  sales.  In  making  such  a  com-
parison the  period  required  for  making  and  selling  of  the  prod-
uct must  be  first  ascertained.  If  the  inventories  are  then  too
large  for  the  volume  of  the  sales,  a  needless  investment  is  being
carried  which  may  be  indicative  of  a  lax  management.  It  may
also  indicate  a  considerable  quantity  of  dead  inventory.  Where,
however,  the  purchase  of  raw  material  can  be  made  at  certain
periods  at  lower  cost,  a  large  inventory  may  indicate  a  decided
advantage.  Also,  if  the  gross  profits  from  operations  compare
favorably  with  the  earnings  of  the  former  periods,  there  is  little
likelihood  of  inflations.
Operating  Net  Income. — In  the  items  to  be  considered  and
deducted  from  gross  returns  in  the  income  statement  to  secure
the  net  profits,  some  distinction  must  be  made  between  the  state-
ments of  Trading  Concerns  and  Manufacturing  Concerns,  and
Public  Utilities  and  Railroads.
