What method does Aplus use to state its fuel inventories?
Aplus Franchise · 2024 FDDAnswer from 2024 FDD Document
ecorded against the allowance when accounts are deemed uncollectible.
Receivables from affiliates arise from fuel sales and other miscellaneous transactions with non-consolidated affiliates. These receivables are recorded at face value, without interest or discount.
Inventories
Fuel inventories are stated at the lower of cost or market using the last-in-first-out ("LIFO") method. Under this methodology, the cost of fuel sold consists of actual acquisition costs, which includes transportation and storage costs. Such costs are adjusted to reflect increases or decreases in inventory quantities which are valued based on changes in LIFO inventory layers.
Merchandise inventories are stated at the lower of average cost, as determined by the retail inventory method, or market. We record an allowance for shortages and obsolescence relating to merchandise inventory based on historical trends and any known changes. Shipping and handling costs are included in the cost of merchandise inventories.
Advertising Costs
Advertising costs are expensed as incurred.
Source: Item 22 — CONTRACTS (FDD page 68)
What This Means (2024 FDD)
According to Aplus's 2024 Franchise Disclosure Document, the company states its fuel inventories at the lower of cost or market value, utilizing the last-in-first-out (LIFO) method. This approach means that the most recently acquired fuel costs are assumed to be the first ones sold. The cost of fuel sold includes the actual acquisition costs, encompassing transportation and storage expenses. These costs are then adjusted to reflect any changes in inventory quantities, which are valued based on shifts in the LIFO inventory layers.
For a prospective Aplus franchisee, understanding the LIFO method is crucial because it directly impacts the reported cost of goods sold and, consequently, the profitability of fuel sales. During periods of rising fuel costs, LIFO can result in a higher cost of goods sold and lower taxable income, potentially offering tax benefits. However, it's important to note that the opposite can occur during periods of declining fuel costs, which could lead to a lower cost of goods sold and higher taxable income.
Additionally, the FDD mentions that as of December 31, 2023 and 2022, Aplus's fuel inventory balance included lower of cost or market reserves of $230 million and $116 million, respectively. These reserves indicate potential reductions in the stated value of fuel inventory due to market conditions. For the years ended December 31, 2023, 2022 and 2021, the Partnership's cost of sales included an unfavorable inventory adjustment of $114 million and favorable inventory adjustments of $5 million and $190 million, respectively. These adjustments reflect the impact of inventory valuation changes on the cost of sales, which can significantly affect the franchisee's financial performance.
It is important for potential franchisees to consult with financial advisors to fully understand the implications of the LIFO method and inventory adjustments on their specific business operations and tax liabilities. Understanding these accounting practices will enable franchisees to better manage their fuel inventory and make informed financial decisions.