A reply to "A Comment on 'The Effects of the Thor Power Tool Decision on the LIFO/FIFO Choice'"

Article Abstract:

A. Seetharaman and T.D. Englebrecht (S&E, 1990), in their comment on Halperin and W.N. Lanen 's 1987 study of the effects of the Supreme Court's Thor Power Tool decision, stated that the use of Fisher's exact test was inappropriate for analysis as marginal totals were not fixed, that the results of the study were sensitive to one industry included in the affected group, and that results change when a different sample is used. S&E also argued that dispersal of information may take longer as the change was a court decision as opposed to a legislative decision. Fisher's exact test is appropriate for the analysis; E. Lehman (1959, 1975) illustrated a Fisher's exact test experiment exactly analogous to the one employed in Halperin and Lanen's study. The sensitivity of the industry was discussed and the industry was excluded from analysis. Extending the sample period would provide noise into the test. Supreme Court decisions are published immediately and widely disseminated.

Lehmann, E., Seetharaman, A., Eglebrecht, T.D.

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A comment on "The Effects of the Thor Power Tool Decision on LIFO/FIFO Choice"

Article Abstract:

R.M. Halperin and W.N. Lanen (H&L, 1987) analyzed the responses of firms to tax law changes resulting from the Supreme Court decision in Thor Power Tool Company v. Comm., which prohibited formula write-downs for determining year-end inventories. The decision required firms to determine year-end inventories using a market value that is congruent with legitimate selling prices. H&L concluded that firms affected by the Thor decision were more likely to switch to the last-in, first-out (LIFO) method for valuing their inventories. The Fisher exact test used by H&L was not the right test for their study. The Fisher test assumes fixed marginal totals, but in the Thor case, marginal totals are not fixed. The use of the more appropriate chi-square test reveals that H&L's results are dependent on the most extreme industry and provides significantly different results from H&L.

Halperin, Robert M., Lanen, William N.

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The effects of the Thor Power Tool decision on the LIFO-FIFO choice

Article Abstract:

The degree to which firms affected by tax changes respond by revising financial reporting accounting methods is examined. The specific tax issue reviewed is the Thor Power Tool case that resulted in limits on the use of formula write-downs for inventories. Empirical analyses of inventory method changes are consistent with the hypothesis that affected firms would switch to last-in-first-out (LIFO) methods during and only during the year in which the tax law changes.

Management, Laws, regulations and rules, Accounting and auditing, Tax planning, Valuation, Inventory control, Inventories

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