Inventory valuation is the process of determining the monetary value of the inventory in the company's stores. The significance of inventory valuation cannot be underscored since the determined figure is used in the income statement, cash flow statement, and the balance sheet. Getting an accurate number is also critical, and the method chosen can affect a company's taxation, money borrowing capabilities, cash flow levels, and the ability to sell the business. Therefore, due diligence must be practiced in picking the appropriate inventory valuation method. The company identified for review of its inventory policies is Under Armour. From the company's 2019 financial statements, Under Armour uses the First in first out method to value its sports merchandise inventory.
The reasons that made the company pick FIFO include the fact that the approach is widely employed and accepted in the industry due to its simplicity. FIFO also enhances the consistency and comparability of results. Adoption of this valuation approach makes it difficult for manipulation of the financial reports since there are no grey areas, and it gives a precise figure of the inventory value to be used in the income stamen and the balance sheet (Simeon, 2018) . Likewise, the inventory value assessed through FIFO gives a fair estimate and the closest estimate to the market value.
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If the company chose LIFO, the inventory balance would show a higher figure, especially in periods of rising inflation ("Effects of Choosing Different Inventory Methods | Financial Accounting," 2020) . The high cost of the cost of goods sold is a result of the LIFO approach, where the most recent goods are sold first. A higher value of sales figure translates to a lower net profit. A reverse impact would result from the implementation of the weighted average method. The inventory valuation would be lower in the period of a general price increase and increase the company's income (Simeon, 2018) . Also, the company would have increased its ability to manipulate reported profits by choosing when to purchase or not the inventory to accomplish the objective of reporting higher or lower net profits.
Under Armour values its inventory at the lower of cost or realizable market value. The company defines the market as the final retail point, where the customers buy its merchandise ("2019 Annual Report", 2020) . Inventory write-down would be caused by maintenance of inventory exceeding customer demand as well as the production of sportswear not meeting customer standards and specifications. In the case of inventory write-down, Under Armour uses a discounted pricing structure to fix the stock value.
References
Effects ofChoosingDifferentInventoryMethods|FinancialAccounting .Courses.lumenlearning.com.
(2020). Retrieved 15 September 2020, from https://courses.lumenlearning.com/suny-finaccounting/chapter/effects-of-inventory-method-on-the-financial-statement/#:~:text=Advantages%20and%20disadvantages%20of%20FIFO,to%20approximate%20the%20current%20market
Simeon, E. (2018). The implication of Choice of Inventory Valuation Methods on Profit, Tax,
and Closing Inventory. Account And Financial Management Journal , 03 (07), Page 2 - 7. https://doi.org/10.31142/afmj/v3i7.05
2019 Annual Report . UA Newsroom. (2020). Retrieved 15 September 2020, from
https://about.underarmour.com/investor-relations/annual-report .
