Question

1. Nucor is the largest steel producer in the United States. Please consider the excerpts from Nucor’s annual report for fiscal year 2014 presented in the next page and answer the following questions.

1. What inventory cost flow assumption(s) does Nucor use to determine the cost of inventories? [2 points]

2. Suppose Nucor had used FIFO as a cost flow assumption for all its inventories. Assume a tax rate of 35%. Would net income for December 31^st, 2014 be higher, lower or the same as currently reported? If you answer higher or lower, please indicate by how much. [3 points]

3. Did Nucor save taxes cumulatively over the years since inception (up to December 31^st, 2014) by using LIFO instead of FIFO as a cost flow assumption? If so, by how much? If not, why? [3 points]

4. What is Nucor’s gross profit margin (=(sales-cost of sales)/sales) as reported? What would Nucor gross-profit margin be if the company had used FIFO as a cost flow assumption for all its inventories? Which of the two numbers you calculated is more informative? [3 points]

5. Note 6 states that “Use of lower of cost or market reduced inventories by $2.7 million at December 31, 2014.” What does this mean? What are the financial statement implications of this event? [3 points]

Excerpts from Nucor’s Financial Statement (Contd.)

2013 CONSOLIDATED STATEMENTS OF EARNINGS Cin thousands, except per share data) Year Ended December 31 2014 2012 NET SALES $21,105,141 $19,052,046 $19,429,273 COSTS, EXPENSES AND OTHER: Cost of products sold (Notes 6, 14 and 18) 19,198,615 17,641,421 17,915,735 Marketing, administrative and other expenses (Notes 3 and 7) 546,198 481,904 454.900 Equity in (eamings) losses of unconsolidated affiliates (Note 10) (13,505) 19,297) 13,323 Impairment of non-current assets (Note 10) 30,000 Interest expense, net (Notes 7, 19 and 20) 169,256 146,895 162,375 19,900.564 18,260.923 18,576,333 EARNINGS BEFORE INCOME TAXES AND NONCONTROLLING INTERESTS 1,204,577 791,123 852,940 PROVISION FOR INCOME TAXES (Note 20) 388,787 205,594 259,814 NET EARNINGS 815,790 585,529 593,126 EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTERESTS 101,844 97,504 88,507 NET EARNINGS ATTRIBUTABLE TO NUCOR STOCKHOLDERS $ 713.946 $ 488,025 $ 504,619 NET EARNINGS PER SHARE (Note 22): Basic $2.22 $1.52 $1.58 Diluted $1.58 See notes to consolidated financial statements Inventories Valuation Inventories are stated at the lower of cost or market. Inventories valued using the last-in, first-out (LIFO) method of accounting represent approximately 43% of total inventories as of December 31, 2014 (45% as of December 31, 2013). Al inventories held by the parent company and Nucor-Yamato Steel Company are valued using the LIFO method of accounting except for supplies that are consumed indirectly in the production process, which are valued using the first-in, first-out (FIFO) method of accounting Al inventories held by other subsidiaries of the parent company are valued using the FIFO method of accounting. The Company records any amount required to reduce the carrying value of inventory to net realizable value as a charge to cost of products sold. $2.22 $1.52 | 6. INVENTORIES Inventories consist of approximately 40% raw materials and supplies and 60% finished and semi-finished products at December 31, 2014, and December 31, 2013. Nucor's manufacturing process consists of a continuous, vertically integrated process from which products are sold to customers at various stages throughout the process. Since most steel products can be classified as either finished or semi-finished products, these two categories of inventory are combined. If the FIFO method of accounting had been used, inventories would have been $567.4 million higher at December 31, 2014 ($624.7 million higher at December 31, 2013). Use of the lower of cost or market method reduced inventories by $2.7 million at December 31, 2014 ($2.1 million at December 31, 2013).

Answer 1

a) Inventory Cost flow assumptions

Nucor being parent company has used LIFO method of accounting for valuation and for supplies which are indirectly used in production process are valued by FIFO method of accounting .

LIFO Cost Flow assumotion : LIFO stands for Last in First out , It is assummed that Last item purchased is sold first and accordingly the inventories are standing outstanding .in books of accounts .

FIFO Cost Flow assumption : FIFO stands for First in First out , It is assummed that First item purchased is sold first and accordingly the inventories are standing outstanding .in books of account

a) Its mentioned in Nucor’s annual report for fiscal year 2014 that if FIFO cost assumption had been used , then inventory would have been higher by $567.4 in 2014 and $624.7 million in 2013 (Let us assume 2013 FIFO method for 2013 as well) and thus change in inventory method will change Opening stock Valuation and Closing Stock

Valuation Increase in inventory leads to increase in Gross Profit and hence there by Net income and vice versa To determine the Cost of Goods Sold following formula is used :

Opening Stock + Purchase Cost + Direct Expenses - Closing Stock

In this case there will be decrease in Net profit by $57.30 (+624.7-567,4)

( Here adapting the COGS formula Adding Change in Opening Stock and deducting Change in CLosing Stock )

Thus the increase in closing stock leads to Decrease in COGS and hence the overall Net income get raise .

(a) In above answers it can be stated if FIFO method was used the Nucor would have saved taxes and Moreover the LIFO method is considered to be realistic assumotion giving highest income.

Nucor has not saved any taxes by using LIFO method

(a) To calucate Gross Profit Margin following formula is used

GP ratio = Gross Profit/total sales *100

whereas Gross Profit = Sales - Cost of Goods Sold

Following are Gross Profit calcaution under both methods

	Gross Profit
	AS per LIFO Method	As per FIFO Method
Sales	$           21,105,141.00	$           21,105,141.00
Cost of Goods Sold	$           19,198,615.00	$           19,198,672.30
Gross Profit	$             1,906,526.00	$             1,906,468.70
Gross Profit Margin	9%	9%

a) Notes 6 indicates the Inventory method LIFO has been used and financial implications is the inventory are overinflated and resulting into increas in  Profits.