Nucor Inventory Reporting and Analysis Harvard Case Solution & Analysis

Switch from LIFO to FIFO method of inventory
The company should change its inventory valuation method from LIFO to FIFO at the start of the year and the company should apply this change retrospectively as the change should be applied retrospectively in order to assess that the company’s performance and it will also give a sensible comparison of the current year financial statements with the previous year financial statements. There are two valuation methods namely FIFO method and LIFO method.
FIFO method:
In the first in first out (FIFO) method, the company’s closing inventory is calculated by taking those units which are purchased recently and they are multiplied by their per unit cost. This gives the company the advantage of previous inventory being sold out first which reduces the risk of obsolescence of the stock and the stock being overvalued.
LIFO method:
The Last in thefirst out method is used for inventory valuation. Under this method, the inventory is valued by selling the last purchased inventory and valuing the closing inventory by those units which were purchased first. Under this method, the new inventory purchased recently is available for sale whereas the old inventory is used as closing inventory. In this method, there is a risk that the old stock purchased might become outdated and might have to be written off in the financial statements. The advantage is that those inventory units purchased last is made available for sale first so the newly purchased stock is not left to become outdated and the stock is being used on a regular basis. LIFO reduces the loss which might incur in case of obsolete stock.
LIFO gives the most benefit when the county’s economy is in recession as the stock is purchased at high cost during inflation and the high costs are matched with the high revenues earned in that particular period and hence this reduces the overall profit leading to a reduction in the income tax of the company.
Nucor Inventory Reporting and Analysis Harvard Case Solution & Analysis


IMPACT ON STOCK PRICE OF SUCH CHANGE
CHANGE FROM LIFO TO FIFO METHOD:
Under this method, the cost of goods sold is overstated as the closing inventory is overvalued as the inventory purchased currently is thought to be expensive than the previous inventory.This method encourages to sell those units which were purchased earlier resulting in those units being left out at the end of theperiod which was purchased recently, to be included in the closing inventory. This, in turn, reduces the overall cost of goods sold and the profits are low too due to an increase in costs. The major impact of this on the share price is that it will reduce the earning per share and comparatively it will lead to an increasein the P/E ratio of the company. As P/E ratio shows the investor confidence and an increase in P/E ratio mean that the investor confidence is boosting despite a decrease in the profits. This situation can be illustrated by dividendirrelevancy theory which states that the investor is not concerned about the dividends but the investor is more concerned about the capital gain he would get in the future and this is the main reason why the investor confidence is boosting despite a fall in the profits of the company..............

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