Inventory Costing Methods

Benefits of FIFO: An Example of Amazon.com

Amazon.com uses the FIFO method of inventory accounting. A major benefit of this method is that it enables Amazon to its inventory costs with the current market value. As such, the method has a positive effect on the company’s financial statements as it shows a higher gross margin. Typically, FIFO presents a lower cost of goods sold, reason being that inventories are valued at lower cost. Regarding the cost of goods sold account, the FIFO method is particularly beneficial to Amazon in light of the Fulfilment by Amazon program, which simply means that registered sellers list their products on Amazon and ship them, from where customer orders are handled by Amazon. By using FIFO, Amazon minimizes cost by ensuring through inventory control such that items do not stay in store for a very long time; this way, storage costs are minimized. Another benefit of using FIFO is reflected in the inventory account: since the central assumption is that goods acquired first are sold first, products that were recently acquired are the ones that will be used in determining value of inventory. As a result, FIFO provides a more accurate picture of the value of inventory at Amazon. As Tardi (2021) states, FIFO provides a more accurate indication of inventory value since the items available as closing stock are those that were acquired most recently. As such, they reflect the prices currently prevailing in the market.

Response to Heather

This is a very insightful post, a concise summary of how Amazon makes money. The phrase “they are a middleman” offers a precise, easy-to-understand description of the meaning of Amazon’s Fulfilment by Amazon program. One question though: you say you are sure that Amazon keeps cost of goods low by staying in contact with manufacturers. Can you provide a few examples to substantiate this claim? Regarding your concern about of items sold at Amazon, I share your fears and would suggest that you do thorough background check, product ratings and customer reviews of all sellers before you decide to place an order with Amazon.

Reference

Tardi, C. (2021). Inventory valuation- LIFO vs. FIFO. https://www.investopedia.com/articles/02/060502.asp

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