Costco Wholesale Corporation is a leading merchandise firm that engages in the sale of a vast range of products ranging from electronics, household ware, and machinery to office ware. Costco recorded a profit of $27 million to merchandise costs resulting from deflationary trends in both 2015 and 2013 (Stock Analysis, 2016). However, in 2014, net inflationary trends caused a benefit of $28 million recorded to merchandise costs (Stock Analysis, 2016). This amplified the cumulative LIFO (Last-in, first-out) valuation of merchandise as at the close of 2015 and 2014, the aggregate effect of the LIFO valuation of merchandise stood at $82 and $109 million respectively (Stock Analysis, 2016).
This firm uses the LIFO valuation method with inventories being valued at the lower cost of market. This method has been advantageous to the corporation in three major ways. First, the method matches the most recent costs with current revenues. The system thus, aids in the reduction of portfolio profits through harmonizing the recent costs and revenues consequently avoiding the understating of the cost of goods sold and overstating the benefit.
Secondly, LIFO is vital in creating tax benefits and improving cash flows especially when used in times of inflation as it was the case with Costco in 2014 (Stock Analysis, 2016). In these instances, current purchases going for higher prices are matched with revenues, thus alleviating the problem of overstated profit, which in turn reduces income tax bill. Another advantage associated with LIFO is the minimization of write-downs as experienced in Costco firm where there is the least likelihood of experiencing a price decline in the future.
However, LIFO is also characterized by some disadvantages such as reduced earnings during inflationary times as experienced in Costco for the years 2013 and 2015 (Stock Analysis, 2016). There is also the problem of understated inventory courtesy of using the oldest costs. Lastly, the use of LIFO brings about the manipulation of income in case of a change in the purchase pattern as the year ends.
Reference
Stock Analysis, (2016).Stock Analysis on Net 100 U.S. Stock Market Leaders. Retrieved August 15, 2016, from https://www.stock-analysis-on.net/NASDAQ/Company/Costco-Wholesale-Corp/Analysis/Inventory
