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Use of Inventories
The members of the Huffman group all sell merchandise (new
and used automobiles). Each, therefore, computes its gross
income from sales during a year by subtracting from sales revenue
the cost of the goods sold. See sec. 1.61-3(a), Income Tax Regs.
Because each is a merchant, each must also use inventories and an
accrual method of accounting to determine the cost of the goods
sold and to match that cost against sales revenue. See secs.
1.471-1 (merchants must use inventories) and 1.446-1(c)(2)(i)
(generally, where inventories necessary, accrual method must be
used with regard to purchases and sales), Income Tax Regs. As
explained by Stephen F. Gertzman (Gertzman) in his treatise,
Federal Tax Accounting, par. 6.02[2], at 6-5 & 6-6, (2d ed. 1993)
(cited hereafter as Gertzman par. __, at __), in the case of a
merchant that sells a large number of essentially similar or
fungible items, the cost of the goods sold during any period is
computed in steps, using inventories and an accrual method of
accounting, along with various assumptions as to the manner in
which the actual costs incurred in acquiring or producing items
of inventory are allocated among the items so acquired or
produced. To compute the cost of goods sold during a year, the
steps are as follows: First, the costs of the items acquired or
produced during the year are aggregated. That total is then
combined with the aggregate cost of the items on hand at the
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Last modified: May 25, 2011