Price Level Changes, Inventory Valuations, and Tax Considerations.

Abstract The article discusses the price level changes, inventory valuation and tax consideration. This article attempts to illustrate the differing tax liabilities which result from various combinations of inventory valuation method, rate of price change, turnover rate, and markup rate during a broad range of historically based inflationary and business cycle price movements. Differences in cost of goods sold become differences in profit before tax figures. The greater the size of the price movement, the greater the differences that will result from the use of alternative inventory valuation methods. The application of the Fifo method results in higher tax liabilities than the amplication of Lifo, both for the total period and for each individual year of the period, because prices rise throughout each case. All major variables and the manner in which they combine must be considered before judgment can be made on the significance of differences in tax liabilities resulting through the use of alternative inventory valuation methods. Differences in tax liabilities which result from alternative inventory methods follow variances in profit figures. In those situations in which profit figures are significantly different, variances in tax liabilities produced by alternative methods are important.