Question

Per the video summary, there are three (3) primary inventory costing methods used by companies: LIFO, FIFO, and Weighted Average. With each method comes a number of pros and cons that a company must consider when implementing its inventory management strategy. Select a company below and discuss the advantages associated with its chosen inventory costing method.

Target (LIFO). Amazon (FIFO), FEDEX (Weighted Average).

Answer 1

Target (LIFO).

Advantages:

1. Target will have a lower reported value of inventory. This is because, in an inflationary economy, LIFO provides the lowest value for the inventory since it assumes that the newest (most expensive) units are sold first and the oldest (cheapest) units are in inventory at the end of the period.
2. Target will have a higher reported inventory turnover ratio. The inventory turnover ratio is calculated as cost of goods sold divided by average inventory. Therefore, the inventory method that gives the lowest value of inventory will give a higher inventory turnover.
3. LIFO will result into higher cost of goods sold that will result into higher tax advantage.

Amazon (FIFO),

Advantages:

1. Amazon handles numerous SKUs. accounting of each one of them itself is a mammoth task. FIFO comes as a boon to Amazon as FIFO is easy to apply.
2. Further, the accounting method matches with the flow of goods. In a normal course of business, flow of goods is physically is also first in, first out.
3. Financials statements will be perfect. There will be no manipulation of income statements line items like cost of goods sold. There will be no manipulation on lines items like inventory, current assets on the balance sheet. Cost of goods sold and inventory values reported will be nearly accurate.

FEDEX (Weighted Average)

Advantages:

1. The inventory cost for Fedex is simple. It's a transporting and distributing company. It will not have much inventory in hand.
2. Weighted average method normalizes the inventory as well as costs of goods sold.
3. The product or services cost is uniform. The same gets applied to inventory valuation or cost of goods sold quantifiecation.