- 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