The student is required to critique, analyze, and evaluate thearticles as they relate to what was learned in class by writing afour to six-page paper (12 font, double spaced, APA format). Theobjective of this activity is for you to be aware of what ishappening in the real world as it relates to financial accountingissues to make the study of accounting more meaningful, and tobridge the gap between theory and practice
LIFO vs FIFO Inventory Accounting at HomeDepot
Last Updated Dec 28, 2008 12:16 AM EST
Home Depot, Inc. announced a key change inaccounting principals in its third quarter filing with the SEC.After adopting a new enterprise resource planning system, otherwiseknown in the wholesale-retail world as an "ERP" system, Home Depotis now keeping track of inventory values in its Canada retailoperations using a weighted-average cost method. Previously Canadainventory values had been determined using a method based on whenthe items were bought called "first-in, first-out."
For some shareholders inventory accounting changes raise red flagsas such moves suggest the company is trying to manage its balancesheet values or profit margins. If price changes are nominal,inventory accounting methods typically render the same balancesheet values and profit levels. That is, First-in, First-out (FIFO)yields the same results as "Last-in, Last-Out" (LIFO) as the pricesare basically the same. However, when prices are rising fast, LIFOleads to falling inventory values on the balance sheet as theolder, lower priced items remain on the balance sheet. If thecompany is unable to pass along rising wholesale or materialsprices to their customers, margins also fall. Ergo, A change toFIFO is tempting.
Apparently, Home Depot management expects the change to aweighted-average cost (WAC) to provide a better match of the costof sales with the revenue generated. The more sophisticatedcalculation is made possible by the new ERP system. As it turnsout, the new accounting method produced an inventory value verynear what would have been reported had Home Depot Canada stuck withthe old FIFO method.
Home Deport operates about 165 stores in Canada. Managementindicates the Canada operation is profitable and same-store salesare positive, but the company does not disclose sales by geography.Total merchandize inventory was $11.9 billion at the end of thefiscal third quarter 2008 compared to $11.7 billion a year-ago.However, as Home Depot's sales in 2008 are off approximately 4%from 2007, going forward the 1.7% increase in total inventory couldbe a source of concern -- should sales continue to fall.
The student is required to critique, analyze, and evaluate thearticles as they relate to what was learned in class by writing afour to six-page paper (12 font, double spaced, APA format). Theobjective of this activity is for you to be aware of what ishappening in the real world as it relates to financial accountingissues to make the study of accounting more meaningful, and tobridge the gap between theory and practice
LIFO vs FIFO Inventory Accounting at HomeDepot
Last Updated Dec 28, 2008 12:16 AM EST
Home Depot, Inc. announced a key change inaccounting principals in its third quarter filing with the SEC.After adopting a new enterprise resource planning system, otherwiseknown in the wholesale-retail world as an "ERP" system, Home Depotis now keeping track of inventory values in its Canada retailoperations using a weighted-average cost method. Previously Canadainventory values had been determined using a method based on whenthe items were bought called "first-in, first-out."
For some shareholders inventory accounting changes raise red flagsas such moves suggest the company is trying to manage its balancesheet values or profit margins. If price changes are nominal,inventory accounting methods typically render the same balancesheet values and profit levels. That is, First-in, First-out (FIFO)yields the same results as "Last-in, Last-Out" (LIFO) as the pricesare basically the same. However, when prices are rising fast, LIFOleads to falling inventory values on the balance sheet as theolder, lower priced items remain on the balance sheet. If thecompany is unable to pass along rising wholesale or materialsprices to their customers, margins also fall. Ergo, A change toFIFO is tempting.
Apparently, Home Depot management expects the change to aweighted-average cost (WAC) to provide a better match of the costof sales with the revenue generated. The more sophisticatedcalculation is made possible by the new ERP system. As it turnsout, the new accounting method produced an inventory value verynear what would have been reported had Home Depot Canada stuck withthe old FIFO method.
Home Deport operates about 165 stores in Canada. Managementindicates the Canada operation is profitable and same-store salesare positive, but the company does not disclose sales by geography.Total merchandize inventory was $11.9 billion at the end of thefiscal third quarter 2008 compared to $11.7 billion a year-ago.However, as Home Depot's sales in 2008 are off approximately 4%from 2007, going forward the 1.7% increase in total inventory couldbe a source of concern -- should sales continue to fall.
