Price Level Adjustments and Inventory Flow Assumptions.

Abstract Determining the cost of inventories for financial statement purposes has presented the accounting profession with a predicament which has worried many accountants for a number of years. It is desirable to determine inventory cost for financial statement purposes in a manner which provides the best indication of periodic income for each particular firm. This should allow comparisons to be made of a company's economic progress from year to year without misleading distortions. The two goals comparability among companies and between years on the one hand and selection of methods to suit individual circumstances, on the other seem to be incompatible. This is because there is wide disagreement among companies concerning the inventory flow assumption which provides the clearest indication of periodic income. The survey of corporation annual reports conducted each year by the American Institute of CPA's reveals that none of the three primary procedures LIFO, FIFO, or average-is used by a majority of companies.