Unintended consequences of LIFO repeal

The case of the oil industry

D. Guenther, R. Sansing

Research output: Contribution to journalArticleScientificpeer-review

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
Original languageEnglish
Pages (from-to)1589-1602
JournalThe Accounting Review
Volume87
Issue number5
Publication statusPublished - 2012

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Unintended consequences
Tax
Oil industry
Cash flow
Firm value
Costs

Cite this

Guenther, D. ; Sansing, R. / Unintended consequences of LIFO repeal : The case of the oil industry. In: The Accounting Review. 2012 ; Vol. 87, No. 5. pp. 1589-1602.
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Guenther, D & Sansing, R 2012, 'Unintended consequences of LIFO repeal: The case of the oil industry', The Accounting Review, vol. 87, no. 5, pp. 1589-1602.

Unintended consequences of LIFO repeal : The case of the oil industry. / Guenther, D.; Sansing, R.

In: The Accounting Review, Vol. 87, No. 5, 2012, p. 1589-1602.

Research output: Contribution to journalArticleScientificpeer-review

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AB - 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 bydetermining 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

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