Question

Choose a US public company that sells inventory (everyone needs to pick a different company). Review their most recent Annual Report. .

Questions

1. What inventory costing method does the company use? Explain why you think the company uses this particular method?
2. What might happen to the company’s income and inventory balance if they chose an alternative costing method? Be specific in your example.
3. Does the company value their inventory at lower of cost or market (LCM)? If so, how does the company define market? What factors might it consider in deciding whether or not to write down its inventory?
4. If the company does not use LCM, what method does the company use to value its inventory in consideration of possible inventory write-downs?

Can help with this question. The company is Costco.

Answer 1

The most recent annual report available for Costco was for the year 2018 and all information was derived from that.

The inventory costing method that the company uses is LIFO method i.e. last in first out method. Costco uses this method because it believes that the LIFO method more fairly represents the results of Costco’s operations. This is because by using the LIFO method Costco is able to more closely match its current costs with its current revenues.

If Costco uses the alternative method of using FIFO method then its income will be higher during periods of inflation and the level of inventory will also be higher. On the other hand if deflationary pressures exist then its income will be lower and the level of inventory at close will also be lower.

Yes, Costco values its inventory at lower of cost or market (LCM). The company has defined its market as three segments or geographies – USA, Canada, and Other International. The factors that Costco might consider in deciding whether or not to write down its inventory are changes in the value of its inventory, drop in the market value of inventory below the book value of inventory and the levels of damaged and unsellable goods.

The last question is not applicable in case of Costco as it does use LCM method with regards to its inventory.