Foreign operations and the choice of inventory accounting methods
Abstract
Many companies continue to use the FIFO or other inventory cost flow assumption even though empirical research has shown that the LIFO assumption provides significant cash flow advantages over the other methods. One potential influence on the choice of inventory method that has not been investigated in prior empirical studies is the potential effect of a firm's foreign operations. Because LIFO is not commonly used and/or permitted in most foreign countries, high levels of foreign inventory may influence the choice of inventory method for the firm's domestic inventory. The purpose of this paper is to determine if a firm's level of foreign operations influences its choice of inventory cost flow assumptions for its U.S. inventory. A probit model of inventory choice is developed using variables that have been found to differentiate LIFO and non-LIFO firms in previous studies. The results indicate firms with higher relative levels of foreign operations are more likely to use a non-LIFO inventory method for their domestic inventory than firms that are less involved in foreign markets. The results suggest that the level of foreign operations should be considered in future models of inventory choice and possibly other accounting choice models when there are differences in accounting standards since firms with significant levels of foreign operations may be influenced by these differences.
Department
Accounting and Finance
Publication Date
1-1-1998
Journal Title
Journal of International Accounting, Auditing and Taxation
Publisher
Elsevier
Digital Object Identifier (DOI)
Document Type
Article
Recommended Citation
Plante, Catherine. Foreign Operations and the Choice of Inventory Accounting Methods with Stanley Sedo and David Gotlob. Journal of International Accounting Auditing and Taxation Volume 7, Number 1, 1998 pp.81-94.