Faculty Scholarship 1994 - Present

An Empirical Analysis of the Inventory Accounting Methods of US Multinational Companies: Segment Effects

Typically the choice of inventory methods for U.S. companies is assumed to reflect the tax savings choice made by the company. Companies choosing to minimize their taxable income choose the LIFO method of accounting for inventories since the tax code requires the use of this method for financial reporting purposes in order to be used for tax purposes too. Companies choosing not to minimize their taxable income or in other words, choosing to maximize their reported income typically are assumed to select a non-LIFO method, such as FIFO. In the international arena, the choice of inventory accounting is frequently limited since a lot of the countries in the world do not permit the LIFO method of accounting. Thus, U.S. Multinational Companies (MNCs) may not be able to select the LIFO method for international operations. The inventory accounting choices made by MNCs has been examined only in a few studies. The purpose of this study is to examine the choice of inventory accounting methods by U.S. MNCs grouped by segment groups. Companies are selected from the Disclosure database. Only MNCs are selected for study, based on disclosures made by the companies on foreign operations. Segment information is examined by disclosures made by the companies in their supplementary schedules. A model is constructed based on theoretical expectations and the hypotheses tested by statistical analyses. The conclusions from this study have implications for policy makers and managers.