Unintended Consequences of LIFO Repeal: The Case of the Oil Industry

This study examines the effect on firm value of repealing the last-in, first-out (LIFO) inventory method for tax purposes. Our model extends prior literature by determining quantities and prices in equilibrium, rather than specifying them exogenously. We find that LIFO repeal could increase the futu...

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Bibliographic Details
Published in:The Accounting review 2012-09, Vol.87 (5), p.1589-1602
Main Authors: Guenther, David A., Sansing, Richard C.
Format: Article
Language:English
Subjects:
Accounting methods
Cash flow
Corporate taxes
Demand curves
Economic equilibrium theory
Effects
Elasticity of demand
Equilibrium
Income taxes
Industrial economics
Industrial output
Industrial production
Institutionalism
Inventory valuation
Last in first out method
LIFO
Marginal revenue
Monetary equilibrium
Oil industry
Petroleum industry
Production management
Studies
Tax expenditure
U.S.A
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Summary:This study examines the effect on firm value of repealing the last-in, first-out (LIFO) inventory method for tax purposes. Our model extends prior literature by determining quantities and prices in equilibrium, rather than specifying them exogenously. We find that LIFO repeal could increase the future after-tax cash flows of firms that had used LIFO, because the higher tax costs associated with FIFO result in lower equilibrium quantities and higher equilibrium output prices, which increase pretax cash flows. We illustrate our model by examining inventory methods used by firms in the oil industry.
ISSN:0001-4826
1558-7967
DOI:10.2308/accr-50194