Merck and Co., Inc. Is an American pharmaceutical company, and it was founded in 1891. It has been a successful firm in the pharmaceuticals industries being the seventh largest in the world. The company employs the Last In First Out inventory costing method. This method encourages the sale of inventory stocked last and favors industries such as Merck & Co, .Inc. The method is appropriate for industries that deal in perishable goods, such as pharmaceuticals industry. An illustrations of the LIFO method is where a company receives a batch of 10 units for 30 dollars each and another ten unit batch for 35 dollars each. Using LIFO, the company will sell its products at the price of the last 35 dollar units. In the balance sheet, the last reflective value is normally that of the last stock taken in rather than the first one. This method can be said to be the most appropriate for this industry and allows the company to sell the right kind of products to the market while making its profits (Bar-Yosef & Sen, 2016). The company does not suffer loss from lawsuits arising from sale of expired products or from poor ethics. Using this method does not necessarily imply that the first stock is sold last as this would mean that it would be more likely to expire and cause harm to consumers. It means that the prices are set differently for the first batch. The LIFO method is appropriate for companies that engage in the sale of bulky and homogenous products.
Merck & Co, Inc. Reported Amount for the Years
The inventory amounts as reported by the company for the years 2014 and 2015 are 4,700 and 5571 in million dollars, respectively. Using this, the Dollar and Percentage Changes in Inventory for Merck & Co, Inc can be computed. The difference in dollars between these two years is 871,000 dollars which reflects a fall in inventory ( Jennings, Simko & Thompson, 2015 ).This is an 18.53 Per cent change. The cost of goods sold which is normally determined by the cost of goods available subtracting ending inventory is 1,017 million dollars. This value is arrived at through adding the initial inventory of 1343 to the cost of goods manufactured (4,374) which both give the cost of goods available (5717). The value of the ending inventory is 4700 which gives the final figure of 1,017.
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In order to calculate the ratio of cost of goods sold to that of net sales, the net sales is established as sales. The valid reflects on Merck’s financial statements as 34,094 and 24,954 for 2015 and 2014 respectively. The ratio of Cost of Goods Sold to that of net sales 1,017: 34,094 is a measure of the company’s profitability arising from inventory. The ratio of 3% in this case, indicates that Merck’s profits from inventory and per unit are at this value ( Jennings, Simko & Thompson, 2015). This is a reasonable value as the company has a positive amount in profits per product. This measure does not indicate how profitable the company is in general. Instead, it only reflects the amount made in profits per item in the inventory. This value is also an average as the company is likely to make more profits on certain items and less than others. The implications of this value is to determine whether business is profitable at all or not. In the event that the company is making a loss per unit sold, then there is need to take action for the same. Companies make profit from sales and other elements such as royalties, patents and trademarks.
Inventory Turnover for Merck & Co, Inc. And implications
The inventory turnover is a measure of the number of times inventory sells in a company. It is arrived at by dividing the cost of goods sold or net sales by the average inventory. Average inventory= (4700+5571)/2. Average inventory for Merck & Co, Inc. =5135.5 while the COGS=1,017. 1,017/5135.5= 0.2 or 2%. This is an indicator of the ability of the company to convert inventory into cash. Seeing that the company is large and multinational, it is important that its inventory turnover be low. Nonetheless, a 2% turnover may be too low. The implications of a low turnover is to ensure that loss is averted through illegal sale of pharmaceutical products. The pharmaceutical industry is a sensitive one following problems arising from self-prescription and prescription abuse by the population (Lindah 2013). The company would suffer gravely in the event that it was careless to let drugs onto the hands of the public. Moreover, the damage that such a leak would cause would render it unethically involved and lacking social responsibility.
Conclusion
The inventory accounting methods employed by Merck & Co, Inc. can be viewed as reasonable for the nature of work it is involved in. The company can however, employ a different method seeing as LIFO has its shortcomings especially where pharmaceutical products are involved. This method, FEFO is first expired first out, encourages the company to sell off the inventory that would easily go bad as compared to what can last longer. The company avoids losses through expiry of products in stock. Unfortunately, this method’s shortcomings revolve around the possibility of the company selling expired products to its market. It is necessary therefore, that the company sells these products within a reasonable timeline. All of the inventory accounting values provided are important in evaluating company performance in the two years provided as per the financial statements. The value of inventory and how this operates affect the profits made within the company and the efficiency of operation for the same.
References
Bar-Yosef, S., & Sen, P. K. (2014). On optimal choice of inventory accounting method. Accounting Review , 320-336.
Jennings, R., Simko, P. J., & Thompson, R. B. (2015). Does LIFO inventory accounting improve the income statement at the expense of the balance sheet?. Journal of Accounting Research , 85-109.
Lindahl, F. W. (2012).Dynamic analysis of inventory accounting choice. Journal of Accounting Research , 201-226.
