Choose A US Public Company That Sells Inventory Everyone Nee

Choose A Us Public Company That Sells Inventory Everyone Needs To Pic

Choose a US public company that sells inventory. Review their most recent Annual Report. Questions: What inventory costing method does the company use? Explain why you think the company uses this particular method. What might happen to the company’s income and inventory balance if they chose an alternative costing method? Be specific in your example. 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? If the company does not use LCM, what method does the company use to value its inventory in consideration of possible inventory write-downs? Initial post due by Thursday. Remember to include at least one scholarly source in your post or comments. Source must be cited in-text and full reference listed at the end of the post, both in APA format.

Paper For Above instruction

Introduction

The choice of a public company that sells essential goods and understanding its inventory management methods provides valuable insights into how businesses optimize their operations, assess risks, and comply with accounting standards. For this analysis, we focus on The Coca-Cola Company, a highly recognizable US-based company that sells beverages frequently consumed by consumers worldwide. By examining Coca-Cola’s latest annual report, we explore their inventory valuation methods, specifically their inventory costing strategy, and examine the implications of considering alternative methods. Additionally, the paper discusses their approach to inventory valuation at the lower of cost or market (LCM), the criteria used to define market value, and potential impacts on financial statements.

Inventory Costing Method Used by Coca-Cola

According to Coca-Cola’s most recent annual report, the company employs the first-in, first-out (FIFO) method to cost their inventory (Coca-Cola, 2022). FIFO assumes that the oldest inventory items are sold first, leaving the most recent costs in ending inventory. Coca-Cola chooses FIFO primarily due to the nature of their product inventory, which consists of beverages with relatively stable and predictable costs over time. FIFO aligns well with their operational processes, as it provides a reasonable approximation of current inventory value and does not significantly distort profits during periods of inflation or deflation.

The company’s preference for FIFO is also informed by industry standards and regulatory guidelines, which often favor FIFO when inventory turnover involves perishable and standard goods, like beverages. Moreover, FIFO simplifies inventory management and aligns with positive cash flow strategies by providing higher inventory valuations during inflation, which can improve financial ratios and borrowing capacity.

Implications of Alternative Inventory Costing Methods

If Coca-Cola were to switch from FIFO to weighted-average cost or LIFO (last-in, first-out), substantial changes could occur in reported income and inventory balances. For example, adopting LIFO during periods of rising costs would typically result in higher cost of goods sold (COGS) and lower net income, reflecting current higher costs more effectively (Brigham & Houston, 2019). Conversely, FIFO tends to produce higher net income during inflation because older, cheaper costs are matched against current revenues.

Regarding inventory balances, FIFO would tend to reflect higher ending inventory values during inflationary periods because the remaining inventory consists of recent, higher-cost items. Switching to LIFO would decrease both income and inventory values, potentially reducing taxable income but also affecting financial ratios and investor perceptions. These variations highlight why Coca-Cola maintains FIFO; it aligns with their financial reporting goals and tax planning strategies.

Lower of Cost or Market (LCM) Valuation

Coca-Cola does value its inventory at the lower of cost or market (LCM), as per generally accepted accounting principles (GAAP). The company defines market as the current replacement cost of inventory, limited by net realizable value (NRV) and not exceeding the net realizable value minus normal profit margins. Coca-Cola considers several factors to determine whether inventory should be written down, including significant drops in market value, obsolescence, damage, or a decline in demand for specific products (Coca-Cola, 2022).

When inventory value falls below its historical cost, Coca-Cola recognizes an inventory write-down, decreasing the reported value on the balance sheet and affecting net income. These adjustments are made systematically to ensure that the inventory is not overstated, maintaining adherence to GAAP and providing a realistic representation of company assets.

Use of Alternative Valuation Methods

If Coca-Cola did not use LCM, it might employ the specific identification or standard cost methods if applicable, but generally, companies follow LCM to adhere to GAAP. Since Coca-Cola’s inventory comprises standardized beverage products, FIFO coupled with LCM valuation ensures they report inventory accurately while managing risks of overstatement due to market fluctuations. Consistent valuation practices help the company evaluate inventory health and adjust for declines proactively.

Conclusion

Coca-Cola’s use of FIFO for inventory costing reflects its operational needs and regulatory environment, enabling consistent financial reporting and risk management. The application of LCM valuation offers a conservative approach to inventory measurement, curtailing overstatement of assets during market downturns. Understanding how these methods impact income and inventory values under varied circumstances is essential for stakeholders assessing the company’s financial health and operational efficiency. The strategic choice of inventory methods underscores the importance of aligning accounting policies with industry standards, economic conditions, and corporate goals.

References

Brigham, E. F., & Houston, J. F. (2019). Fundamentals of financial management (15th ed.). Cengage Learning.

Coca-Cola Company. (2022). Annual Report 2022. Retrieved from https://www.coca-colacompany.com/investors/financial-reporting

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