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Deere & Company and CNH Global N.V.Case Study #3Kimberly Chacko, Diana Tokar, Alma Sanchez and Andrew ReinhartSpring 2020 ACC 602 – Global Financial and Managerial Reporting Dr. Sylwia Gornik, CMA, CFM
2Case Study #3 | Chacko, Tokar, Sanchez and ReinhartThe following case study compares the inventory reports and turnover ratios of the two companies: Deere& Company, and CNH Global. Both competitors are in the heavy equipment manufacturing industry; withDeere & Company being headquartered in the United States, and CNH Global being headquartered in theNetherlands. This case study will allow for the analysis and comparison of two different inventoryaccounting methods, LIFO v. FIFO, depending on the location of the company’s headquarters. Deere &Company, being located in the U.S., uses the LIFO method for the majority of their inventory accounting,in accordance with U.S. GAAP. Whereas CNH Global, being located in the Netherlands, utilizes the FIFOmethod for its entire inventory accounting, as per the International Financial Reporting Standards (IFRS)that only permits the use of FIFO.Conceptsa. Explain the risks and benefits associated with holding inventory. Companies face the dilemma of balancing the right amount of inventory. Firms face the amount of profita business stands to gain. It also helps companies determine how much more or less inventory is neededto satisfy demand. There are different types of inventory costs: purchasing costs, taxes, labor cost,obsolescence, insurance, security, and transportation and handling. The formula to calculate the cost ofinventory is:Inventory carrying rate = (inventory cost / inventory value) + opportunity cost + insurance + taxesThere are different risks and benefits associated with holding inventory. There are various risks and costsof maintaining higher levels of inventory such as:(1) Blockage of cash / Risk of price decline:The prevention of cash flow means that holding more inventory will lead to blockage of cash fundsunnecessarily. Holding it back increases the risk of prices declining. This is possible because of anincrease in the supply of products in the market by competitors, the introduction of a new competitiveproduct, and competitive pricing policy of competitors.(2) Risk of Obsolescence: This happens when the inventory becomes obsolete or outdated due to external factors that affect theinventory directly, such as technology, lack of improvements in product design and changes in consumers’tastes, to name a few. In other words, the markets are in constant flux and affect the line of product inhand. A firm that keeps excess inventory runs the risk of obsolescence of the stocks.(3) Purchase cost:This is where a firm pays a higher price for managing inventory. Inventory auditing needs to take intoaccount the amount paid to suppliers and the expense of transporting materials to the location, and theinsurance and transportation costs.
3Case Study #3 | Chacko, Tokar, Sanchez and Reinhart(4) Risk of low sale volume: