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

Forthcoming, The Accounting Review, September 2012

Posted: 10 Jun 2010 Last revised: 16 Apr 2013

See all articles by David A. Guenther

David A. Guenther

University of Oregon - Department of Accounting

Richard C. Sansing

Tuck School of Business at Dartmouth

Date Written: June 9, 2010

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 that increase pretax cash flows. We illustrate our model by examining inventory methods used by firms in the oil industry.

Keywords: LIFO, FIFO, tax incidence

JEL Classification: H25, M41

Suggested Citation

Guenther, David A. and Sansing, Richard C., Unintended Consequences of LIFO Repeal: The Case of the Oil Industry (June 9, 2010). Forthcoming, The Accounting Review, September 2012 . Available at SSRN: https://ssrn.com/abstract=1622795 or http://dx.doi.org/10.2139/ssrn.1622795

David A. Guenther

University of Oregon - Department of Accounting ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
541-346-5384 (Phone)

Richard C. Sansing (Contact Author)

Tuck School of Business at Dartmouth ( email )

100 Tuck Hall
Hanover, NH 03755
United States
603-646-0392 (Phone)
603-646-1308 (Fax)

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