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Accounting Research Center, Booth School of Business, University of Chicago

Does LIFO Inventory Accounting Improve the Income Statement at the Expense of the Balance Sheet? Author(s): Ross Jennings, Paul J. Simko and Robert B. Thompson II Reviewed work(s): Source: Journal of Accounting Research, Vol. 34, No. 1 (Spring, 1996), pp. 85-109 Published by: Wiley on behalf of Accounting Research Center, Booth School of Business, University of Chicago Stable URL: http://www.jstor.org/stable/2491333 . Accessed: 30/11/2012 14:09 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp

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Journal of AccountingResearch Vol. 34 No. 1 Spring 1996
Printed in USA.

Does LIFO Inventory Accounting Improve the Income Statement at the Expense of the Balance Sheet? ROSS JENNINGS,* AND ROBERT B. PAUL J. SIMKO,t II+ THOMPSON

1. Introduction
In this paper, we compare the extent to which LIFO income statements and balance sheets and their "as if" non-LIFO counterparts explain the cross-sectional distribution of equity values for a sample of LIFO firms. It is often argued that LIFO income statements are more useful as a basis for valuation than those prepared under alternative cost-flow assumptions (such as FIFO or average cost) because LIFO cost of goods sold is based on relatively current inventory costs. In contrast, non-LIFObalance sheets are alleged to be more useful for valuation because their inventory values, also based on relatively current costs, better represent the net assets available to generate future resource inflows. The view that LIFO enhances the usefulness of the income statement while reducing the usefulness of the balance sheet has stimulated several

*University of Texas at Austin; tEmory University; +University of Maryland at College Park. We are especially grateful to Jim Ohlson and an anonymous reviewer for comments on previous drafts. In addition, we benefited from the comments of Rowland Atiase, Randy Beatty, Dennis Chambers, Dick Dietrich, Robert Freeman, David Guenther, Bong Han, Bill Kinney, Marc LeClere, Lisa Martin, John Robinson, Senyo Tse, T J. Wong, and participants in accounting workshops at Columbia University, George Washington University, New York University, and the 1993 American Accounting Association Convention. We also thank Tom Stober for generously making his data on inventory liquidations available. Finally, Ross Jennings is grateful to the University Research Institute at the University of Texas at Austin for financial support. 85 Copyright?, Instituteof ProfessionalAccounting, 1996

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86

JOURNAL OF ACCOUNTING RESEARCH, SPRING

1996

financial reporting policy initiatives. In 1972, the Securities and Exchange Commission required firms using LIFO to disclose the "LIFOreserve" at each balance sheet date.' In 1986, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants considered a proposal to permit LIFO firms to prepare non-LIFO balance sheets (Bohan and Rubin [1986]). More recently, the...
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