Case Study of Accounting

9. If Nucor were considering switching from LIFO to FIFO, what date would it have chosen to make the change? Why?

The inventory method that a company choose to use is mainly related with cost-of-good-sold and the ending inventory, but not the actual physical inventory sold.

Compare cost-of-good-sold in two inventory methods (Figure1), the value in LIFO method is sustained higher from 2006 to 2008, and from 2008 to 2015, FIFO does. Difference uses LIFO minus FIFO (Figure2) shows that the cost decreased during period, which LIFO resulted in a higher cost-of-goods expense and a lower end of period inventory values (Figure3). Movements in LIFO do not take better place in financial statement. The difference in Gross Profit between LIFO and FIFO (Figure 5) decreased from 2009. Even in 2010 and 2011, Though gross profit in LIFO is lower than in FIFO, the performance showed weaken than previous years (-258.6 in 2011 vs -683.8 in 2009). Therefore, advantage of using LIFO is to reduce the tax liability is not clear. Figure 6 is the amount of tax saved due to different inventory methods, the trend is gradually decreased in ten years. Especially from 2010, the amount of tax saved flopped in each year, and in 2012, the advantage of saving tax is no longer working. FIFO becomes a better method.

For this reason, it is better for Nucor switches inventory method from LIFO to FIFO in the year of 2012.

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10. If Nucor did switch from LIFO to FIFO, what information would that convey about the company’s raw material price expectations? What will happen to the stock price? Explain.

The inventory's purchase price is the key determining factor on the LIFO-to-FIFO switch's impact on a financial statement. In times of cost increases, LIFO will result in a higher cost-of-goods expense, but lower end-of-period inventory values. However, in times of cost decreases, LIFO will result in a lower cost-of-goods expense, but higher end-of-period inventory values. Nucor considers to switch inventory method from LIFO to FIFO, probably forecast that raw material price will or have already decreased year by year. Using LIFO is no longer have advantages.

However, the performance of stock price has a negative relationship with LIFO reserve. (Figure 7) The trend of LIFO reserve shows a consistently deceasing from 2012, the stock prices should go up accordingly.

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