Assignment:
• Use the Internet to research the annual report of at least one (1) merchandising company. For example, while you can't use this one, here is one from Walmart.
• Determine which costing method (Last In First Out [LIFO], First In First Out [FIFO], or weighted average cost) is used to record inventory by your selected company.
• Share three (3) advantages and three (3) disadvantages of using the type of costing method (LIFO, FIFO, and weighted average) that the company has implemented.
• Provide support for your response.
Please read and respond to the post of another student below.
Monaca:
I have selected Kroger which is an American retail company with headquarters in Cincinnati, Ohio. The company mainly uses LIFO method for valuation of inventory (Kroger: 2016 Annual Report).
Advantages of LIFO:
• The LIFO method provides a better measurement of current earnings by matching most recent costs against current revenues
• LIFO method has tax benefit. When LIFO is used in the periods of inflation, the current purchases at higher prices are matched against revenues that alleviate the overstatement of profit and therefore reduce income tax bill
• LIFO method is simple to operate and easy to understand
Disadvantages of LIFO:
• The LIFO method reduces reported earnings during the periods of inflation. Therefore, many companies fear that an accounting change to LIFO will have a negative effect on investors and will reduce the price of company's stock
• Under LIFO method, the balance sheet inventory figure is usually understated because it is based on the oldest costs. Due to understatement of inventory, the working capital position may look worse than it really is
• LIFO involves considerable clerical work
Reference
Kroger: 2016 Annual Report.