High dividend stocks – AGNC analysis of the income account> extraordinary losses> other elements in inventory accounting ((tags: high dividend stocks, AGNC, analysis of the income account, extraordinary losses, other elements in inventory accounting)

Different methods of inventory accounting can skew earnings reports.  However, the subject of this article is not applicable to AGNC.  I searched for the words “inventory”, “inventories”, “last-in”, “first-out”, and “costs of goods sold” in AGNC's 2009 annual report and most recent quarterly 10-K filing.  Those words do not appear in their SEC filings.

I decided to reprint the relevant section of Securities Analysis 2^nd edition since the subject of inventory accounting is not applicable to AGNC:

Other Elements in Inventory Accounting. The student of corporate reports must familiarize himself with two permissible variations from the usual accounting practice in handling inventories. As is well known, the standard procedure consists of taking inventory at the close of the year at the lower of cost or market. The “cost of goods sold” is then found by adding purchases to the opening inventory and subtracting the closing inventory, valued as described.

Last-In, First-Out. The first variation from this method consists of taking as the cost of goods sold the actual amount paid for the most recently acquired lots. The theory behind this method is that a merchant’s selling price is related mainly to the current replacement price or the recent cost of the article sold. The point is of importance only when there are substantial changes in unit values from year to year; it cannot affect the aggregate reported profits over a long period but only the division of results from one year to another; it may be useful in reducing income tax by avoiding alternations of loss and profit due to inventory fluctuations.  

The Normal-stock or Basic-stock Inventory Method. A more radical method of minimizing fluctuations due to inventory values has been followed by a considerable number of companies for some years past. This method is based on the theory that the company must regularly carry a certain physical stock of materials and that there is no more reason to vary the value of this “normal stock” from year to year—because of market changes—than there would be to vary the value of the manufacturing plant as the price index rises or falls and to reflect this change in the year’s operations. In order to permit the base inventory to be carried at an unchanging figure, the practice is to mark it down to a very low unit price level—so low that it should never be necessary to reduce it further to get it down to current market.