Managing Interacting Accounting Measures to Meet Multiple Objectives: A Study of LIFO Firms

Abstract:     
We examine whether managers adjust LIFO inventories, other current accruals, and depreciation consistent with the objective of minimizing taxes, debt-related costs, costs of foregoing smoothed earnings, and adjustment costs. Our findings indicate long-time LIFO users on average manage inventories to smooth earnings and reduce debt costs and manage current accruals to smooth earnings and lower taxes. Unlike earlier studies we do not find strong evidence of year-end inventory management to increase LIFO tax savings. Our findings also indicate previous period accruals, contemporaneous operating cash flows, and operating cycle length influence current period accruals' predetermined levels and adjustment costs.

JEL Classification: M41, H25

Accepted Paper Series