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Should Last In First Out Inventory Valuation Methods Be Eliminated?

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  • Peter Harris

Abstract

The Last in First out Method (LIFO) is presently under severe scrutiny from the financial community which may soon culminate in its repeal as an acceptable accounting method. There are pressures from the SEC in conjunction with the International Financial Accounting Standards Board to standardize accounting standards worldwide. In addition, there is political pressure imposed by the US Obama administration to raise additional revenues. Both groups strongly oppose LIFO, raising a strong possibility that’s its complete elimination as an accounting method will occur by as early as 2014. Are these groups correct in their negative assessment of LIFO? This paper examines critically the many disadvantages of LIFO. Ultimately, the author theorizes that these negatives may collectively explain the observed research findings of the inverse relationship between LIFO adoption and firm value. The elimination of LIFO which seems imminent may result in a win-win situation for all; as the negative and added costs of LIFO may well exceed its tax advantage, resulting in greater cash flow for the firm, while allowing for the standardization of worldwide accounting standards and raising additional tax revenue for the US government.

Suggested Citation

  • Peter Harris, 2011. "Should Last In First Out Inventory Valuation Methods Be Eliminated?," Global Journal of Business Research, The Institute for Business and Finance Research, vol. 5(4), pages 53-67.
    • Handle: RePEc:ibf:gjbres:v:5:y:2011:i:4:p:53-67
    as

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    References listed on IDEAS

    as
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    2. Anne B. Fosbre & Ellen M. Kraft & Paul B. Fosbre, 2009. "The Globalization Of Accounting Standards : Ifrs Versus Us Gaap," Global Journal of Business Research, The Institute for Business and Finance Research, vol. 3(1), pages 61-71.
    3. Michael R. Kinney & William F. Wempe, 2004. "JIT Adoption: The Effects of LIFO Reserves and Financial Reporting and Tax Incentives," Contemporary Accounting Research, John Wiley & Sons, vol. 21(3), pages 603-638, September.
    4. Biddle, Gc & Ricks, We, 1988. "Analyst Forecast Errors And Stock-Price Behavior Near The Earnings Announcement Dates Of Lifo Adopters," Journal of Accounting Research, Wiley Blackwell, vol. 26(2), pages 169-194.
    5. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    6. Hunt, Hg, 1985. "Potential Determinants Of Corporate Inventory Accounting Decisions," Journal of Accounting Research, Wiley Blackwell, vol. 23(2), pages 448-467.
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    More about this item

    Keywords

    GAAP; IFRS; LIFO; LIFO; LIFO Conformity LIFO Reserve; FIFO.;
    All these keywords.

    JEL classification:

    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • M49 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Other

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