So I’m reading over a 10-Q of a small cap agricultural equipment manufacturer and I noticed they use FIFO, LIFO & Weighted Averages for their inventory. It seems reasonable because they don’t use more than one method for each factory (e.g. N. America factory uses FIFO, S. America LIFO and Europe Wt. Avg.). I’ve never seen this before though and wanted to see if anyone had any insight on this… is this a potential red flag?
no - just adjust the two others to the inventory method you want
That’s what I did… I had just never seen it before and thought it was a little odd.
It isnt all that common, but I would suspect it comes from a inconsistent structure in the corporate group. The company I work at uses different methods of costing for different hubs (standard costing vs. Weighted avg and then a FIFO basis in another entity), but it is driven more by the way the company grew (acquisition), and not having a corp group that really drives any changes after the mergers…Not saying it is a red-flag, but could mean they are somewhat decentralized (that is our case).
Totally makes sense now… the company I’m looking at has been growing through acquisitions. Thanks!
a small cap company is busy making acquisitions? You might want to investigate that.
I was going to float the acquisitions hypothesis. If a company using LIFO acquires a company that uses FIFO, it could take a long time for inventories to be readjusted to a single system, or it might never happen.
Though, presumably, a LIFO reserve number should be easy enough to use.
Yeah, it usually isnt all that simple/quick to change, especially if it is a small company doing the buying as they probably dont have all that many resources dedicated to things of this nature. In the grand scheme of things it isnt so critical (as well, if you are buying into different countries you could have some statutory hurdles to jump through). Probably depends a lot on the ERP strategy amd migration as well.
Valid point, but the acquisitions are small in scale and are being done so in order to expand in international markets. The rest of the industry is doing the same, so it makes sense. It certainly does warrant some investigation though.