Wyburn Malone

One of Wyburn Malone’s largest institutional clients was interested in taking a substantial equity position in Nuware. One reason for the interest is Nuware’s continued earnings growth during a three-year period of difficulty in the retail industry

Wyburn Malone

• Was an independent equity research firm servicing more than 40 institutional clients
• WM releases a WM Report 6 times a year

The task at hand

• Malone addresses that Nuware was selectively selling certain securities in order to time the recording of gains to raise net income.
• Both companies were virtually identical, similar product lines

My notes:

Merchandise Inventory:

• Lifo for inventory?? Wtf
• Changed deflation/inflation rates to adjust ending inv, which resulted in lower net income, EPS an diluted EPS by $2.1 million, $0.02 and $0.02, respectively ←how estimates fuck shit up, adjust to old way or perhaps R.P stuart way
• Inventories under fifo would have been higher, which means increased cost of sales and lower net income. <- Did not do this

To determine the new inventory values, first determine purchases each year. Then create a schedule of new inventory balances.. items affected: inventory, cost of sales

Nuware’s choice of LIFO method when measuring inventories and cost of sales associated is allowed under U.S. GAAP. Nuware changed the basis of the internal index to measure inflation/deflation rates on supplier cost, resulting in an adjustment to the ending inventory for the year 2012. Prior to the rate change, ending inventory for 2012 would have been $2 million higher. However, the change resulted in a LIFO provision of $35.1 million instead of $33 million.

R.P. Stuart uses FIFO, an inventory measurement method allowed under IFRS. The FIFO method does not allow recognizing a provision; therefore, estimates by management cannot further bias the ending inventory. Under the FIFO method, both Nuware’s beginning and ending inventory would have been higher by $35.1 and $29.5 million. Since ending inventory would not be higher by the same amount as the beginning inventory, that means $5.6 million of inventory was expensed through cost of sales. Therefore, cost of sales is currently understated. The restated cost of sales is about $1,007,492 and results in lowering net income.