Which inventory valuation method would likely result in lower taxes during inflationary periods?
Practice Questions
1 question
Q1
Which inventory valuation method would likely result in lower taxes during inflationary periods?
FIFO
LIFO
Weighted Average
Specific Identification
LIFO would likely result in lower taxes during inflationary periods because it reports higher cost of goods sold.
Questions & Step-by-step Solutions
1 item
Q
Q: Which inventory valuation method would likely result in lower taxes during inflationary periods?
Solution: LIFO would likely result in lower taxes during inflationary periods because it reports higher cost of goods sold.
Steps: 7
Step 1: Understand what inventory valuation methods are. These are ways to calculate the value of inventory a company has.
Step 2: Learn about LIFO (Last In, First Out) and FIFO (First In, First Out). LIFO means the most recently purchased items are sold first, while FIFO means the oldest items are sold first.
Step 3: Recognize that during inflation, prices of goods increase over time.
Step 4: Realize that using LIFO during inflation means the company will sell the more expensive, recently purchased items first.
Step 5: Understand that selling these higher-cost items results in a higher cost of goods sold (COGS).
Step 6: Know that a higher COGS reduces the company's taxable income, leading to lower taxes.
Step 7: Conclude that LIFO is beneficial for reducing taxes during inflationary periods because it reports higher costs.
