Amazon, an online retailing behemoth that challenges itself “To be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, (Amazon, 2018).” To do this, the company runs its inventory using the First In First Out (FIFO) model of inventory management.
FIFO as an inventory management system has important advantages that has the potential to determine how far a business can go with relation to competition. The main motivation of this model of calculating the cost of goods sold is the issue of ensuring its inventory are up to date and in no single time will the company dispatch an obsolete item to a customer (Gaur & Kesavan, 2015). With obsolete items, companies are forced to dispose them for the sake of the company’s image. Obsolescence of merchandise can be a significant source of costs which eats up on profit. FIFO is often in a position to increase the value of remaining inventory hence increasing the value of the firm and net income. This can be used as a means to lure in investors.
FIFO is not without faults. The inventory recording approach does not have an elaborate and accurate way to depict rising costs out of material price increase. It is possible for material costs to rise than what is was in the previous methods. This leaves the accountants using the old costs effectively failing to pick up the current situation. This leaves managers with little explanation about the mismatch between the recorded and actual expenditure. FIFO does not guarantee a company the tax advantage that comes with LIFO. Income tax is a significant item of expenditure and reducing the same is admirable. FIFO requires an elaborate warehouse management system to ensure that the oldest goods are fished first. This might require the installation of systems, both soft and hard which does not come cheap as noted by Atieh et al., (2016).
Atieh, A. M., Kaylani, H., Al-abdallat, Y., Qaderi, A., Ghoul, L., Jaradat, L., & Hdairis, I. (2016). Performance improvement of inventory management system processes by an automated warehouse management system. Procedia Cirp, 41, 568-572.
Amazon (2018). Investor Relations. Amazon Website. Retrieved from http://phx.corporate-ir.net/phoenix.zhtml%3Fc%3D97664%26p%3Dirol-irhome
Gaur, V., & Kesavan, S. (2015). The effects of firm size and sales growth rate on inventory turnover performance in the US retail sector. In Retail Supply Chain Management (pp. 25-52). Springer, Boston, MA.
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