A LIFO liquidation increases earnings, and management can choose to create a LIFO liquidation by deciding when inventory is replaced. Delaying replacement by a few days at year-end can create a LIFO liquidation and improve earnings. Scholars are often interested in learning whether management actually makes choices such as a LIFO liquidation in order to increase earnings.
Discuss the implications of a managerial decision from an ethical position. Also state whether you believe it is likely that scholars would observe a pattern in LIFO liquidation decisions when they study a large number of companies. Such a study might ask the question: What did analysts expect earnings to be and what were they actually? Furthermore, they might focus on companies that would have reported earnings below analysts’ expectations had they not recognized LIFO liquidations. Specifically, were LIFO liquidations more likely for companies that would otherwise report earnings below what the analysts were forecasting?