There are a number of risks and benefits to holding inventory. The benefits of holding inventory are avoiding lost sales due to backordered goods. Quantity discounts can also be had from ordering inventory in large quantities. The costs of placing orders are reduced, because fewer orders will need to be made. Production runs are more efficient when running large quantities when compared to smaller quantities. There is also less risk in production shortages. The disadvantages of holding inventory are the large expenses of cash required to purchase the inventory. If the inventory is not sold, the asset may depreciate, or become obsolete which will require a write-off. There are also tax burdens to holding large amount of inventory. Inventory also requires storage space, and storage fees will be likely. Raw inventory would hold the raw materials for production. For example, a manufacturing plant producing engine blocks would likely hold aluminum ingots or raw castings.
Work in progress inventory is somewhere between raw and finished. To continue the example, an engine block that has had machining done, but not fully assembled would constitute as work in progress. Finished inventory is product that is ready to be sold to the customer. Companies use cost flow assumptions to value inventory based on the industry they are in. Normally companies will use the same cost flow assumptions as their competitors or nature of the industry they are in. John Deere uses LIFE as their cost flow assumption. d) The balance sheets of the two companies would differ in the LIFO reserve John Deere must have on the balance sheet. For John Deere, they utilize LIFO, which “stores” the value of the product in inventory more than FIFO. John Deere can keep their inventory stocked with lower priced goods on the balance sheet, when in reality they are moving all the same inventory. If prices are decreasing over time, LIFO is not favorable, as more expensive inventory will be held.
The Business plan on Executive Summary – John Deere
John Deere is an iconic one hundred and seventy-seven year old company and maker of agricultural machinery headquartered in Moline, Illinois. What started as a small business operation has sprung into a multibillion-dollar global operation. In 2013 alone, the company boasted sales of $37.80 billion. Founded in 1837 by a blacksmith, the company originally only built plows, and did not assemble ...
