 Inventory Reporting and Analysis
INTRODUCTION
Nucor [NUE] is one of the largest steel
companies in the United States. Get all the relevant financial data about Nucor
from
WRDS
for the 1997 to 2006 period. Nucor has used the LIFO method for all inventories
during the entire time period. [WRDS username: a516su08; for password email me]
CASE OBJECTIVES The objectives of this case are to
1. Show the impact of Nucor’s use of the LIFO inventory method on
its:
• Balance sheet • Income statement • Cash from operations
• Financial ratios.
2. Discuss the advantages and disadvantages of use of the LIFO
method.
3. Discuss the relationship between price trends and use of the
LIFO method.
Required
1.
Calculate gross margin (both $ level and as a percent of sales) under both the
LIFO and FIFO methods for the years 1997–2006.
2. Discuss the
differences in the level, trend, and variability of gross margins under the two
methods.
3. Calculate net income assuming Nucor had used the FIFO method
of reporting for 1997–2006 and discuss differences in the level, growth rate,
and variability of net income under the two methods.
4. Calculate stockholders’ equity per share assuming Nucor had
used the FIFO method of reporting for 1997–2006. Compare your results to
reported equity and discuss the difference in level and growth rate.
5. Calculate Nucor’s cash from operations assuming Nucor had used
the FIFO method of reporting for 1997–2006. Compare your results to reported
cash from operations and discuss the difference in level and growth rate.
6. Calculate the following ratios for Nucor, using both reported
data and assuming it had used the FIFO method of reporting, for 1997–2006:
• Current ratio • Return on (average) equity
Discuss the effect of using LIFO on the level and variability of
both ratios.
7. Calculate Nucor’s inventory turnover ratios for 1997–2006,
using:
(i) LIFO data (ii) FIFO data (iii) Current cost data
Discuss the differences among these three turnover ratios and
select the method that provides the best measure of economic turnover. Discuss
the trend in Nucor’s inventory turnover over the 1997–1999 period. Discuss
factors that might account for the variability of reported turnover.
8. Using the results of Questions 1–7, discuss the advantages and
disadvantages to Nucor of use of the LIFO method over the 1997–2006 time period.
9. Nucor’s LIFO reserve at December 31, 1999 was less than 6% of
gross inventory (FIFO basis) compared with a peak of more than 27% at December
31, 1990. There have been no LIFO liquidations during this time period.
(a) What information does this decline provide about the price
trend in steel scrap (Nucor’s major raw material input)?
(b) Discuss how this decline affects the advantages and
disadvantages to Nucor of using the LIFO method.
10. If Nucor were
considering switching from LIFO to FIFO, what date would it have chosen to make
the change? Why?
11. If Nucor did switch from LIFO to FIFO, what information would
that convey about the company’s price expectations? Explain.
12. Nucor's inventory
shot up in 2006. Why? How does NUCOR explain this ? Check the
relevant sections of the company's 10K for 2006.
13. Nucor's stock
price has shot up in the last two years. Why? Compute the returns and
answer. How do NUCOR and analysts explain this? Check the company's
10K and relevant sections for 2006 and search the web for articles on NUE.
14. Steel Dynamics
[STLD], a Nucor competitor, uses the FIFO inventory method.
(a) Using reported data, compute each of the following ratios for
1999 for Steel Dynamics:
• Gross profit margin • Return on equity • Inventory turnover
ratio.
(b) Assume that Steel Dynamics used the LIFO inventory method.
Redo (a) using adjusted ratios for Steel Dynamics. For each ratio, use the
methods you deem most appropriate and justify your choice.
Notes:
•
For questions 1-11 assume that Nucor used LIFO for 100% of the inventories,
though this is not entirely true.
• Assume that tax rate is (Pretax income - Net income)/Pretax
income. (This is not entirely correct and we will fix it in the next few
chapters).
• Full Cost of Goods Sold for manufacturing companies should
include Depreciation. Compustat reports depreciation separately. You should add
it to the reported cost of goods sold.
• Analyze carefully what happened to inventories in 1998. Did
they increase in units, LIFO and FIFO. What do the numbers mean? Go to
www.Nucor.com or [1999 Nucor 1999 10-K report] and check why there was
a dramatic decrease in LIFO reserves in 1998? [look at the financial statements
and footnotes relating to inventory].
• A recent article extolling Nucor
The Art Of Motivation
at Nucor
• Annual reports: 2006
2003
08-06-06
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