Th& Accounting Historians Journal Vol. 9, No. 1 Spring 1982
Harry Zvi Davis BARUCH COLLEGE CITY UNIVERSITY OF NEW YORK
HISTORY OF LIFO
Abstract: The history of LIFO illustrates the interplay of taxes and the general ac-ceptance of accounting principles. In this paper, the gradual acceptance of LIFO in the United States is traced. The study focuses on both the theoretical evolution of LIFO and its acceptance by taxing authorities and accountants.
According to the American Accounting Association Committee on Accounting History,1 the prime example of an historical study which deserves attention is "the evolution of last-in, first-out (LIFO) inven-tory accounting as an acceptable method of computing taxable in-come for Federal Income Tax purposes and its subsequent evolu-tion as a 'generally accepted accounting principle.' " In this paper, the acceptance of LIFO in the United States is traced.
Historically, LIFO can be viewed as an outgrowth of the base stock method.2 Therefore, a brief history of the base stock method in England and in America is presented before the history of LIFO.
The Base Stock Method—Development in England and America Definition of Base Stock
A company that uses the base stock method defines a certain quantity of inventory as the normal amount necessary to continue operations. This quantity of inventory, sometimes called the "nor-mal stock," is the minimum necessary as long as the business does not reduce or enlarge operations. Since the base stock is consid-ered a permanent investment, any change in its value is ignored. In contrast, inventory above the normal quantity is intended for im-mediate resale and is thus a transitory investment. Goods sold are deemed to come from quantities purchased over and above the
I wish to thank David O. Green, Nathan Kahn, Kenneth Most, Hanns-Martin
Schoenfeld, Norman Berman, and an anonymous reviewer for their helpful com-ments.