Use The Internet To Research The Annual Report Of At Least O

Use The Internet To Research The Annual Report Of At Least One 1 Mer

Use the internet to research the annual report of at least one merchandising company. Determine which inventory costing method (LIFO, FIFO, or weighted average cost) the selected company uses. Share three advantages and three disadvantages of that costing method, providing support for your response.

Paper For Above instruction

The purpose of this paper is to analyze the inventory costing method employed by a selected merchandising company, supported by an examination of its recent annual report. For this purpose, I have chosen Walmart Inc., one of the world's largest retailers, to understand its inventory valuation approach, which significantly impacts its financial statements. After establishing the method used, I will discuss three advantages and three disadvantages of that specific costing approach, enriched with relevant academic and practical insights.

Determining the Inventory Costing Method in Walmart Inc.

Walmart’s annual reports reveal that the company primarily uses the First-In, First-Out (FIFO) inventory valuation method. As per Walmart’s financial disclosures, FIFO is the predominant method utilized for inventory valuation, which aligns with the industry standards and Walmart’s strategic inventory management approach. FIFO assumes that the oldest inventory items are sold first, and the newest inventory remains on hand, reflecting current market prices more accurately during periods of inflation.

Advantages of FIFO

1. Reflects Current Market Values

FIFO enhances the relevance of inventory valuation on the balance sheet by aligning the ending inventory with recent purchase prices. During inflationary periods, FIFO assigns the most recent costs to ending inventory, providing a more realistic valuation that appeals to investors and creditors (Heising, 2012). Consequently, this method offers a clearer picture of the current value of inventory.

2. Improves Financial Ratios

Because FIFO results in lower cost of goods sold (COGS) during inflation, it yields higher gross profit and net income figures. This can positively influence key financial ratios, such as return on assets (ROA) and gross profit margin, potentially making a company appear more profitable and financially stable (Naoum, 2018).

3. Simplicity and Ease of Implementation

FIFO's straightforward nature simplifies inventory management and accounting procedures. It is easier to track and implement as it follows a chronological order of inventory purchases, reducing errors and the need for complex allocation calculations (Weygandt, Kimmel, & Kieso, 2018).

Disadvantages of FIFO

1. Lower Tax Benefits During Inflation

Since FIFO results in higher reported profits in inflationary environments, it can lead to higher taxable income, increasing the company's tax liability. Companies utilizing FIFO may face higher taxes compared to other methods like LIFO, especially when prices rise consistently (Graham & Harvey, 2001).

2. Potential for Inventory Overstatement

FIFO can overstate inventory on the balance sheet during inflation, leading to an inflated asset position that may not accurately reflect the liquidation value of inventory if markets decline. This overstatement can mislead stakeholders about the company's actual financial position (Heising, 2012).

3. Reduced Tax Shield Benefits in Downturns

In deflationary or declining price environments, FIFO may report lower profits, which could be advantageous for tax purposes. However, in periods of rising prices, FIFO's higher profit figures can lead to a mismatch between reported earnings and actual cash flows, potentially complicating tax planning and cash flow management (Naoum, 2018).

Conclusion

Walmart’s choice of FIFO as its primary inventory valuation method has strategic advantages, particularly in a high-inflation economy, where it offers more accurate reflections of current inventory values and simplifies accounting processes. However, this approach also presents notable disadvantages, including higher tax liabilities and potential overstatement of inventory values. The decision to employ FIFO underscores the importance of aligning inventory valuation methods with a company’s broader financial strategies, market conditions, and stakeholder expectations.

This analysis underscores that selecting an appropriate inventory costing method requires careful consideration of the economic environment and organizational objectives, as each method’s strengths and weaknesses can uniquely impact financial reporting and tax obligations.

References

  • Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243.
  • Heising, C. P. (2012). Inventory valuation methods and their impact on financial ratios. Journal of Accounting and Business Research, 40(3), 225-239.
  • Naoum, S. (2018). Financial ratios and inventory valuation techniques: An analysis. International Journal of Economics and Financial Issues, 8(3), 107-112.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial Accounting (11th ed.). Wiley.
  • Walmart Inc. (2023). Annual Report 2022. Retrieved from https://stock.walmart.com

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