For Nikes 2023 10-K Form Assuming rising prices, Nike’s inventory method results in more net income than if LIFO was used. True False
The correct answer and explanation is:
Correct Answer: True
Explanation:
Nike, Inc., as per its 2023 Form 10-K, uses the FIFO (First-In, First-Out) method for inventory valuation. This choice significantly affects the financial reporting of net income, particularly in environments where prices are rising, such as during periods of inflation.
FIFO vs. LIFO in Inflationary Times:
- FIFO assumes that the oldest (cheapest) inventory is sold first. Therefore, the cost of goods sold (COGS) is based on lower historical costs, which means the gross profit and net income are higher.
- LIFO (Last-In, First-Out), on the other hand, assumes the newest (more expensive) inventory is sold first. That results in higher COGS and lower net income under inflation.
Since prices of raw materials, labor, and transportation have generally been increasing, Nike’s use of FIFO means that:
- The older, cheaper inventory is recorded as sold.
- This leads to lower COGS.
- Consequently, higher gross profit and net income are reported compared to if Nike used LIFO.
Nike’s 10-K Disclosure:
In the 2023 10-K, Nike confirms the use of FIFO for inventory. This inventory method aligns with U.S. GAAP and is commonly used by companies looking to present stronger earnings during inflationary periods. If Nike were to use LIFO, the reported net income would likely be lower, due to higher COGS from newer, more expensive inventory.
Conclusion:
Given that prices are rising and Nike uses FIFO, the company benefits from higher net income than it would under LIFO. Thus, the statement is True.
Note: The LIFO method is not permitted under IFRS (International Financial Reporting Standards), so companies like Nike that operate globally typically use FIFO or weighted-average costing.