Part 1: Post a Response
View this short introduction to the discussion.
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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 I nventory costing method.
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Company
Amazon.com Inc. (AMZN)
Analysis of Inventory
Dif culty: Advanced
Inventory Accounting Policy
Inventory Disclosure
Inventory Accounting Policy
Inventories, consisting of products available for sale, are primarily accounted for using the rst-in, rst-out method, and are valued at the lower
of cost and net realizable value. This valuation requires Amazon.com to make judgments, based on currently available information, about the
likely method of disposition, such as through sales to individual customers, returns to product vendors, or liquidations, and expected
recoverable values of each disposition category.
Amazon.com provides Ful llment by Amazon services in connection with certain of the sellers’ programs. Third-party sellers maintain
ownership of their inventory, regardless of whether ful llment is provided by Amazon.com or the third-party sellers, and therefore these
products are not included in the inventories.
Amazon.com also purchases electronic device components from a variety of suppliers and uses several contract manufacturers to provide
manufacturing services for the products. During the normal course of business, in order to manage manufacturing lead times and help ensure
adequate supply, Amazon.com enters into agreements with contract manufacturers and suppliers for certain electronic device components. A
portion of Amazon.com’s reported purchase commitments arising from these agreements consists of rm, non-cancellable commitments. These
commitments are based on forecasted customer demand. If Amazon.com reduces these commitments, Amazon.com may incur additional costs.
Amazon.com also has rm, non-cancellable commitments for certain products offered in the Whole Foods Market stores.
Source: Amazon.com Inc., Annual Report
Inventory Disclosure
Amazon.com Inc., Statement of Financial Position, Inventory
USD $ in millions
Dec 31, 2017
Inventories
16,047
Dec 31, 2016
Dec 31, 2015
11,461
Dec 31, 2014
10,243
8,299
Dec 31, 2013
7,411
Source: Based on data from Amazon.com Inc. Annual Reports
Item
Description
The company
Inventories
Carrying amount (lower of cost or market) as of
the balance sheet date of inventories less all
valuation and other allowances. Excludes
noncurrent inventory balances (expected to
remain on hand past one year or one operating
cycle, if longer).
Amazon.com Inc.’s inventories increased from
2015 to 2016 and from 2016 to 2017.
Copyright © 2018 Stock Analysis on Net (https://www.stock-analysis-on.net)
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Company
FedEx Corp. (FDX)
Analysis of Inventory
Dif culty: Advanced
Inventory Accounting Policy
Inventory Disclosure
Inventory Accounting Policy
SPARE PARTS, SUPPLIES AND FUEL
Spare parts (principally aircraft-related) are reported at weighted-average cost. Allowances for obsolescence are provided for spare
parts currently identi ed as excess or obsolete as well as expected to be on hand at the date the aircraft are retired from service.
These allowances are provided over the estimated useful life of the related aircraft and engines. The majority of FedEx’s supplies and
fuel are reported at weighted-average cost.
Source: FedEx Corp., Annual Report
Inventory Disclosure
FedEx Corp., Statement of Financial Position, Inventory
USD $ in millions
May 31, 2018
May 31, 2017
May 31, 2016
May 31, 2015
May 31, 2014
May 31, 2013
525
514
496
498
463
457
Spare parts, supplies and fuel,
less allowances
Source: Based on data from FedEx Corp. Annual Reports
Item
Description
The company
Spare parts, supplies and fuel, less
allowances
Carrying amount (lower of cost or market)
as of the balance sheet date of inventories
FedEx Corp.’s spare parts, supplies and fuel,
less allowances increased from 2016 to
less all valuation and other allowances.
Excludes noncurrent inventory balances
(expected to remain on hand past one year
2017 and from 2017 to 2018.
or one operating cycle, if longer).
Copyright © 2018 Stock Analysis on Net (https://www.stock-analysis-on.net)
Target’s Inventory Method
Copy of Target’s 10-k Footnotes for year ended January 28th 2012
Just like Wal-Mart (one of Targets biggest competitors) and other retail
companies, Target uses the last in, first out (LIFO) inventory accounting method.
When calculated for accounting statement purposes, the inventory is valued at the
lower of LIFO or market cost. This is done to insure that the numbers are as
conservative as possible. LIFO values Target’s Cost of Goods Sold (COGS) higher
than the other inventory accounting methods (FIFO and Average Cost) therefore Net
Income is lower with LIFO than with any other method.
Inventory is usually one of the largest current assets for retail companies so
it is very important that investors feel that these numbers are not inflated. This is
the basic reason for the popularity of LIFO. Also, Target updates its inventory
numbers every time a purchase is made through barcodes and scanning product
information directly into their master database when customers makes a purchases.
This makes it easy for them to use the perpetual accounting method and devote
more of their staff to customer service. Most retail companies find it accurate and
effective to use bar codes to easily keep track of merchandise.
Also disclosed in the footnotes is information about some of the special sales
contracts that Target makes with their suppliers/vendors. Target arranges contracts
with vendors/suppliers whereby they do not pay for the merchandise until it is sold.
Merchandise in the stores that are under those contracts is not recorded as
inventory; instead the profits and cost of these items are consolidated under the
Consolidated Statement of Financial Position. So in effect Target has merchandise on
it’s shelves that does not belong to the company or does not affect any inventory
numbers. The sales received from these types of contracts are mentioned in the
footnotes. They also show in the footnotes the sales that they actually accumulated
from these kinds of contracts. So, shareholders and potential investors can see that
the inventory numbers presented on the balance sheet is not a complete
representation of the total amount of merchandise that the company has available
to sell.
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