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The company currently refers to the LIFO method to value inventory costs. At the same time, alternative options must also be considered to seek the optimal strategy for evaluating the water sporting equipment sold. First of all, the concepts of LIFO, FIFO and Weighted Average method must be defined to gain a better understanding of their mechanisms. Secondly, the methods advantages and disadvantages will be highlighted to make a final recommendation on which method would be most suitable for Wild Water Sports Inc.
In that way, the LIFO also known as the Last-In, First-Out model, is currently implemented in the companys structure and is based on the idea that the recent inventory products have been sold first (Khan et al., 2018). Therefore, this valuation process is efficient for firms that specialize in selling products with long-term or nonexistent expiry dates. The FIFO method, First-In, First-Out, on the other hand, requires the oldest items to be considered sold primarily prior to the recent ones (Khan et al., 2018). Consequently, such strategies are often incorporated by companies that offer products with short-term expiry dates or trend tendencies, such as food and retail. Ultimately, the Weighted Average method is the quotient resulting from the cost of available products divided by the number of items being sold (Khan et al., 2018). The strategy is key when the average cost for available units must be calculated while considering the inventory left in the warehouse.
Moreover, as the main concepts have been defined, evaluating their strengths and weaknesses is critical. The LIFO method is primarily beneficial in reducing income taxes, guarantying the stability of company income, and outlining a clearer view of the firms current earnings (Ching et al., 2019). On the contrary, it has been criticized for the vast number of products stored in warehouses for prolonged periods. In that way, the types of firms that could utilize this method are limited to those specializing in selling products that cannot expire and domestic economic regulations (Ching et al., 2019). Moreover, the FIFO method additionally simplifies the process of calculating net income and costs of sold items as minimal manipulations can be done, therefore explaining its general consistency and wide use. Still, one main disadvantage is the instability of the scheme in times of inflation and unexpected fluctuating patterns (Ching et al., 2019). Lastly, the Weighted Average method involves beneficial features of minimal inflation impact and stable prices (Khan et al., 2018). The strategy has been incorporated into the structures of many companies due to the minimal risk factors associated with it, as well as its manageable nature. On the other hand, it proves to be disadvantageous in cases of relating the recent costs to the total income as the average calculations involved do not accentuate the roles of the last sales (Khan et al., 2018). Hence, each of the following methods can be successfully incorporated into an organization depending on its produced inventory.
The process of switching the companys valuation plan from LIFO to FIFO and the Weighted Average method includes certain financial statement implications. For instance, modifying Wild Water Sports Inc. to accommodate FIFO will result in the declaration of a higher annual profit than in the case of the Weighted Average method utilization (Simeon & John, 2018). Consequently, a higher tax will be paid in the case of FIFO implementation. The FIFO method will also ensure that the recent ending inventory reflects the actual prices of the inventory items (Simeon & John, 2018). The Weighted Average method will consequently demonstrate fewer advantages for the financial statement, which possible investors will overview.
Based on the conducted research, one valuation method can be highlighted as the optimal strategy for Wild Water Sports Inc. While all three accounting principles comprise promising features for a business corporation, the specific aspects that will favor Wild Water Sports Inc. should be selected. The Weighted Average method may seem more reliable in terms of a stable pricing system, yet its inability to include recent product sales into its calculation process will prove to be problematic for the company from a long-term perspective. Either way, a transition must occur between the main principles of counting sold items. At the same time, the FIFO model has more drastic differences from LIFO compared to the other methods. FIFO-based inventory valuation will aid in simplifying or reducing the financial manipulations that were necessary with the previous strategy. Furthermore, the company can benefit from the sales of older items in stock, as well as their economic recording.
In conclusion, the conducted research has highlighted the significance and implications of not only reviewing but switching to another inventory valuation method. As previously mentioned, all of the discussed strategies included specific benefits and complications that had to be filtrated to seek the optimal plan for Wild Water Sports Inc. In the end, the prioritization of adequate net income calculations, as well as a guaranteed higher annual profit as key components, have underlined the efficiency of the FIFO model in comparison to the other methods. The switching of the company from the LIFO plan will also benefit its revenue by modifying the sale procedure to be better structured and decrease unnecessary inventory. Hence, the recommended changes can potentially serve as the foundation for a company rebranding to yield higher net income.
References
Ching, P. L., Mutuc, J. E., & Jose, J. A. (2019). Assessment of the quality and sustainability implications of FIFO and LIFO inventory policies through system dynamics. Advances in Science, Technology and Engineering Systems, 4(5), 69-81.
Khan, A. K., Faisal, S. M., & Aboud, O. A. A. (2018). An Analysis of Optimal Inventory Accounting ModelsPros and Cons. European Journal of Accounting, Auditing and Finance Research, 6(3), 65-77.
Simeon, E. D., & John, O. (2018). Implication of choice of inventory valuation methods on profit, tax and closing inventory. Account and Financial Management Journal, 3(7), 1639-1645.
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