Hachette USA, Inc., As Successor to Hachette Publications, Inc. and Curtis Circulation Co., Subsidiary - Page 21

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               The purpose of maintaining inventories is to assure that the           
          costs of producing or acquiring goods are matched with the                  
          revenues realized from their sale.  Hamilton Indus. v.                      
          Commissioner, 97 T.C. 120, 130 (1991); Rotolo v. Commissioner,              
          88 T.C. 1500, 1515 (1987).  Inventory accounting accomplishes               
          this by accumulating production or acquisition costs in an                  
          inventory account rather than allowing an immediate deduction for           
          the costs when they are incurred.  When the related goods are               
          sold, these costs are removed from the inventory account and                
          recorded as costs of sale, which reduce taxable income for the              
          year of sale.  The matching principle is fundamental to inventory           
          accounting and is required by the definition of gross income for            
          a manufacturing or merchandising business.  Sec. 1.61-3(a),                 
          Income Tax Regs.  An item is not removed from closing inventory             
          and reflected in cost of goods sold until the income from the               
          item is realized under the taxpayer's method of accounting.                 
               Accounting for inventories is governed by sections 446 and             
          471.  Section 446(b) provides that the taxpayer's method of                 
          accounting must clearly reflect income in the opinion of the                
          Secretary.  Section 471 provides that inventories shall be taken            
          on such basis as the Secretary prescribes and establishes "two              
          distinct tests to which an inventory must conform.  First it must           
          conform 'as nearly as may be' to the 'best accounting practice,'            
          a phrase that is synonymous with 'generally accepted accounting             
          principles.'  Second, it 'must clearly reflect the income.'"                




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