- 17 -
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.]
Page: Previous 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 NextLast modified: May 25, 2011