Reported Income and Inventory Change

HE recession of 1957-58 has been marked by a large liquidation of inventory, especially in manufacturing industries. The book value of manufacturing and trade inventories declined from $91.3 billion in August, 1957, to $85.9 billion in July, 1958-a liquidation of $5.4 billion.' During periods of such inventory change, the choice of accounting conventions in valuing inventory may play a significant part in determining reported earnings. Highly preliminary results of a study now under way indicate that at least $500 million of the decline in corporate earnings for the above period may be caused by the accounting treatment of manufacturing inventory. This paper will consider differences in income produced by two such accounting conventions-conventional and direct costing.