The Coca-Cola Company (KO)
An Update on the Inventory Situation after 4Q’21
We reviewed the basics of KO’s inventory accounting in our free series exploring the impacts of the different inventory accounting methods. Readers can link to it here.
Remember that KO utilizes both the FIFO (first-in, first-out) and the Average Cost Method. Under FIFO, the company computes cost of sales based on its oldest inventory first. Under average cost, the company calculates the average cost per unit of inventory on hand and inventory acquired during the current period and that figure is used to calculate the total cost of units sold during the period. Both these methods will result in higher reported profits than the LIFO (last-in, first-out) method during periods of inflation as the cost of higher goods is delayed from hitting the income statement while sales will benefit immediately from the company raising prices. A close examination of recent inventory trends indicates that KO’s profits may have yet to experience the full impact of higher costs, indicating an increased risk of reporting disappointing profits in the next couple of quarters.