Repealing the LIFO Inventory Accounting Choice? A Review of LIFO and Inventory Management

Abstract

Researchers in the disciplines of both Operations and Accounting have studied Inventory Management, though in relative isolation. In this paper, one of our goals is to help inform researchers in Operations Management about an extensively debated question in inventory accounting: whether to repeal the LIFO (Last-In-First-Out) inventory accounting choice? This question has received extensive scrutiny from various stakeholders including academics, businesses, and different levels of governmental agencies such as US Congress. Specifically, we provide a literature review on how LIFO affects and is affected by inventory management. This is done by first reviewing the potential determinants of LIFO inventory accounting choice and then reviewing potential interactions between LIFO and inventory management. It is our hope that this review will help stakeholders have a more comprehensive understanding of LIFO before making their decisions.

The Effectiveness of Corporate Governance in Constraining Earnings Management in Pakistan

“…Managerial discretion also influences the choice of acceptable accounting methods for inventory costing, such as last-in-first-out (LIFO), first-in-first-out (FIFO), and average cost. These can have a significant impact on accounting outcomes in different economic conditions (Zhang, Shi, Gao, & Wang, 2014) and on recording transactions such as accelerated depreciation or the straight-line method. Waweru and Riro (2013) argue that managers also use their discretion in working capital management such as in receivables policies, the timing of inventory purchases, and inventory levels.…”