Inventory Control under Corporate Income Tax and Accrual Accounting

https://www.tandfonline.com/doi/full/10.1080/24725854.2022.2128235

37 Pages Posted: 29 Jan 2021 Last revised: 28 Nov 2022

See all articles by Zhan Pang

Zhan Pang

Purdue University - Krannert School of Management

Yixuan Xiao

Washington State University

Date Written: September 21, 2021

Abstract

Corporate income tax constitutes a significant portion of financial costs in business operations. A typical tax system is characterized by the tax structure, accounting method, and loss carryover rule. In this article, we study the optimal inventory policies under taxation and accrual accounting. We consider a lost-sales periodic-review inventory system under a proportional tax with loss carryforward. We formulate the problem as a cyclic stochastic dynamic program with multiple accounting periods, each of which consists of multiple review periods. We show that an income-dependent basestock policy is optimal. We find that tax function convexity and loss carryforward may introduce conflicting incentives into inventory decisions: the former drives risk-averse decisions whereas the latter induces risk-seeking behavior. We identify two intertemporal effects of taxation, the intra-accounting-period effect and the inter-accounting-period effect, both inducing smaller basestock levels. We further extend the analysis to the progressive tax, backordering system, and cash accounting method. Our numerical study examines the effects of various characteristics of taxation on the optimal policies. Our results demonstrate that ignoring taxation in inventory decisions may lead to significant losses especially when the tax rate and demand uncertainty are sufficiently high, which reveals the value of tax considerations in inventory management.

Keywords: Inventory management; corporate income tax (CIT); accrual accounting; stochastic dynamic programming

Suggested Citation

Pang, Zhan and Xiao, Yixuan, Inventory Control under Corporate Income Tax and Accrual Accounting (September 21, 2021). https://www.tandfonline.com/doi/full/10.1080/24725854.2022.2128235, Available at SSRN: https://ssrn.com/abstract=3735233 or http://dx.doi.org/10.2139/ssrn.3735233

Zhan Pang (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Yixuan Xiao

Washington State University ( email )

Wilson Rd.
College of Business
Pullman, WA 99164
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
83
Abstract Views
642
Rank
539,499
PlumX Metrics