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Public company LIFO reserves fell from 2012 to 2015, a time when commodity prices generally fell, and LIFO reserves and commodity prices both rose moderately in 2016. Using a combination of IRS and public company data, we estimate overall U.S. LIFO reserves from 2012 to 2016, and the potential tax revenue impact of LIFO repeal. At a 35% (20%) rate, taxing the 2016 LIFO reserves would yield between $19 ($11) and $24 ($14) billion. Although fewer than 1% of 2013 corporate and partnership tax returns with inventory used LIFO, LIFO inventories comprised about 14% of the dollar value of U.S. company inventories. The findings on LIFO usage and the magnitude of LIFO reserves are relevant to deciding whether LIFO should be retained as an acceptable inventory method for taxes and U.S. GAAP, and also provide context for instructors teaching about inventory methods.

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We discuss the role and economic significance of the last-in, first-out (LIFO) inventory accounting method in the current tax system, both as a matter of practice and of policy. After examining the traditional justifications for LIFO we argue that LIFO, as it is administered, is inconsistent with both its own objectives and with broader income tax principles. LIFO, as practiced in the United States today, benefits only a narrow range of businesses; they in turn rely on it entirely for its tax benefits, rather than to complement normal business operations. Further, the evidence on LIFO suggests that it creates inefficiencies in business operations, and may facilitate earnings management. We conclude that any discussion of fundamental tax reform must consider the repeal of LIFO.
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A valuation approach is used to examine the effect of the LIFO inventory method on the relation between the market value of a firm's stock and the book value of equity. The paper develops three competing hypotheses that have different predictions regarding the relation between the LIFO reserve and the market value of equity. Results indicate a significant negative relation between the LIFO reserve and the value of equity, inconsistent with the pricing of LIFO reserves as unbooked assets, but consistent with a model that views the LIFO reserve as a measure of the effect of increases in factor input prices on firm value. Résumé. Les auteurs ont recours à une évaluation pour examiner l'incidence de la méthode DEPS de détermination du coût des stocks sur la relation entre le cours de l'action d'une société et sa valeur comptable. Ils élaborent trois hypothèses concurrentes qui débouchent sur des prédictions différentes en ce qui a trait à la relation entre la réserve résultant de l'utilisation de la méthode DEPS et la valeur marchande de l'entreprise. Les résultats indiquent une relation négative significative entre cette réserve et la valeur comptable de l'entreprise, relation qui ne concorde pas avec le prix de ladite réserve que l'on voudrait assimiler à un actif non comptabilisé, mais qui cadre avec un modèle selon lequel la réserve résultant de l'utilisation de la méthode DEPS est considérée comme une mesure de l'incidence des hausses du prix des intrants sur la valeur de l'entreprise.
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Using matched samples of JIT adopters and non-adopters, we examine the association of JIT adoption with firms' financial reporting and tax incentives, earnings management histories, and LIFO reserve levels. We find evidence that adoption decisions are influenced by the interaction of firms' LIFO reserves with their income smoothing, debt covenant, and tax incentives. We also find that adoption is less likely for firms historically engaging in high degrees of earnings management, particularly when such firms have no substantial LIFO reserves. Our study extends earlier research demonstrating a relation between inventory valuation method and year-end inventory transactions, and documents a relation between earnings management incentives and a fundamental supply chain design choice.
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The SEC has proposed the full adoption of IFRS by U.S. filers by 2014, with larger firms adopting the international standards as early as 2010. One important change to U.S. accounting standards that would accompany a move to IFRS is the elimination of the Last-in First-out (LIFO) accounting method for inventory. Moreover, because of the LIFO conformity rule, a move away from LIFO for financial reporting purposes also means that the advantages of LIFO for tax purposes could be lost to these firms. The purpose of this study is to examine the income, balance sheet, cash flow and tax effects of a required move to FIFO from LIFO. Presently, approximately 36% of U.S. companies use LIFO for at least a portion of their inventories. We examine a sample of 30 such companies with the greatest LIFO exposure. We find that on average, had FIFO been used by these firms in 2007, pre-tax income and net income would be higher by 11.97% and 7.42%, respectively, the current ratio would be higher by 26.2% and shareholders’ equity would be higher by 34.2%. Of particular note is the significant amount of income taxes that these firms would owe, ranging up to the hundreds of millions if not billions of dollars, if they were required to adopt FIFO accounting. Accordingly, investors, lenders and other users of financial statements will want to watch developments on this front carefully.
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