Question

Inventories

Inventories on the Consolidated Balance Sheets are valued at the lower of cost and net realizable value on a weighted-average cost basis. The Company reduces the carrying value of inventory through a lower of cost and net realizable value adjustment, the impact of which is reflected in cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive Income (Loss). The lower of cost and net realizable value adjustment is based on the Company’s consideration of multiple factors and assumptions including demand forecasts, current sales volumes, expected sell-off activity, composition and aging of inventory, historical recoverability experience and risk of obsolescence from changes in economic conditions or customer preferences.

Additionally, as part of inventory valuation, inventory shrinkage estimates based on historical trends from actual physical inventories are made each quarter that reduce the inventory value for lost or stolen items. The Company performs physical inventories on a periodic basis and adjusts the shrink estimate accordingly.

Using the Above information about Inventory,

What Inventory Costing method does A&F use to value it's inventory ?

Answer 1

In the United States of America companies have to adhere to the Generally Accepted Accounting Principles (GAAPs). The US GAAPs allow companies in the US to use LIFO, FIFO and weighted average costing methods to value inventories. The company in this case has used weighted average costing method to value its inventories as per the applicable standards of US GAAPs. The inventory valuation standards as per the GAAPs strictly says that the company must value its inventories at lower of net realizable or cost. Accordingly, in this case the inventories have been reduced to net realizable value when such inventories net realizable value has reduced below cost. The company considers multiple factors in reducing the value of inventories to net realizable value in case such situation arise due to the reduction in net realizable value of inventories below cost. The company also provides for inventory shrinkage is another instance to show that the company takes its inventories very seriously thus, the profit and loss account of the company and its balance sheet reflect its true and fair performance and position respectively.    

Hence, here it is clear that the company has followed US GAAPs and weighted average costing method to value its inventories correctly. Also incorporating the inventory shrinkage in inventory valuation is another important step to correctly value inventories in the financial statements of the company.