Accounting for Inventory
In most economies, prices are not completely stable. Inflation occurs in many economies, and deflation—a general decrease in prices—is not unheard of, although it’s less common. In addition, even in times of general price stability, prices of specific items can rise and fall.
Because prices change, the way a retailer accounts for the goods it buys and then sells (or the way a manufacturer accounts for the materials it buys) can affect its cost of goods sold and, therefore, its reported income.
Consider what I mean. Suppose a small fuel-oil supplier bought 1,000 gallons of fuel oil in June for $1 a gallon, 1,000 gallons in July for $2 a gallon, and 1,000 in August for $3 a gallon. Suppose in September that he sold ...