Inventory valuation methods across industry groups

Abstract

This thesis looks at inventory valuation methods, specifically first in, first out (FIFO) and last in, first out (LIFO), and the differences that these two methods create. Previous research focuses on the reasons why managers may choose one or the other and what they gain from their decision. I focus on the investor's perspective and how the chosen inventory method affects how they see the success of a potential investment. In this research, I look at seventeen industry groups spanning across approximately twenty-one years. Specifically, I examine earnings per share (EPS), return on assets (ROA), and profit margin. After my evaluations, I came to the conclusion that inventory valuation methods will affect how an investor sees a company and mangers should take this into consideration when deciding which one to use. It is more likely that a LIFO firm will be more appealing to an investor than a FIFO firm. The number of firms using FIFO or LIFO is decreasing as managers switch to average cost. I suggest that more research be done into how many people invest in a company and how it correlates to their inventory valuation method.