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

ABSTRACT

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.

Keywords:  LIFO, FIFO, tax incidence

Source : David A. Guenther and Richard C. Sansing (2012) Unintended Consequences of LIFO Repeal: The Case of the Oil Industry. The Accounting Review: September 2012, Vol. 87, No. 5, pp. 1589-1602.