Dow A. and Sandra E. Huffman, et al. - Page 7

                                        - 7 -                                         
          revenues to compute a meaningful gross profit.”  Gertzman par.              
          7.02[1], at 7-4. Gertzman posits that businesses have a                     
          continuing need for a certain level of inventory, and he                    
          justifies LIFO on the ground that the changing costs associated             
          with maintaining that level of inventory should be expensed in              
          the year incurred.  Id.  Gertzman believes that the LIFO                    
          objective of matching is achieved because the costs associated              
          with changing prices are generally reflected in the cost of goods           
          sold.  Id. at 7-5.  To the extent so reflected, those costs (when           
          increasing) are, in effect, treated as deductible expenses.5  See           
          id.  Because the LIFO method matches current revenues against               
          relatively current costs, Gertzman views the LIFO method of                 
          accounting as producing a “meaningful” or “true” measure of the             
          gross profit from sales for a period.  Id. at 7-4 & 7-5.                    
               For a taxpayer whose ending inventory computed under LIFO              
          reflects the lower prices of antecedent purchases (rather than              
          the higher price of current purchases), the income tax advantage            
          of LIFO is obvious: a reduction in current income, leading,                 
          generally, to a reduction in current income tax.  The potential             
          for increased gain on account of the allocation of the lower                


               5  In the example supra in note 4, the use of LIFO instead             
          of FIFO increased the cost of goods sold by $0.64 (from $38.82 to           
          $39.46).  That $0.64 represents the inflation that had occurred             
          during the year in the cost of the 12 items that remained on hand           
          at the end of the year ((10 units x increase in price of $0.06 a            
          unit) + (2 units x increase in price of $0.02 a unit)).                     




Page:  Previous  1  2  3  4  5  6  7  8  9  10  11  12  13  14  15  16  17  18  19  20  Next

Last modified: May 25, 2011