E.W. Richardson - Page 17

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          year cost.  To compute the annual deflator index, Investments               
          divides the ending inventory at actual cost by the beginning of             
          the year value of ending inventory.8  This results in a current             
          year annual deflator index.  The current year annual deflator               
          index is then multiplied by the annual deflator index from all              
          prior years to arrive at the cumulative deflator index.  The                
          ending inventory on the books at actual cost is then divided by             
          the cumulative deflator index to arrive at the ending inventory             
          expressed at base-year cost.9                                               
               Once ending inventory at base-year cost is computed, it is             
          compared to beginning inventory at base-year cost.  See sec.                
          1.472-8(e)(2)(iv), Income Tax Regs.  If ending inventory valued             
          at base-year cost exceeds beginning inventory at base-year cost,            


          8    Investments divided the total beginning of the year number             
          of vehicles for each unit of inventory, e.g., model line, by the            
          total beginning of the year cost for all the vehicles in that               
          unit, resulting in an average cost for the unit.  This average              
          cost was then multiplied by the number of vehicles on hand and in           
          transit at yearend for that particular unit to determine the                
          beginning of the year value of ending inventory for the unit.               
          The total for each unit was then summed to reach beginning of the           
          year value of ending inventory.                                             

          9    Comparing the link-chain method with the double-extension              
          method, one commentator has noted:                                          
                    The basic approach of the link-chain method is                    
               comparable to the double-extension method, except that the             
               base year is rolled forward each year.  Thus, instead of               
               referring back to a fixed base period for purposes of                  
               pricing items, each years’s current costs are restated in              
               terms of the prior year’s costs.  These costs may then [be]            
               indexed back to the base year through the use of a                     
               cumulative price index. [1 Schneider, supra at 14-96; fn.              
               refs. omitted.]                                                        



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