What is the primary disadvantage of using the FIFO method?
Practice Questions
1 question
Q1
What is the primary disadvantage of using the FIFO method?
Higher taxes during inflation
Lower net income
Complex record-keeping
None of the above
The primary disadvantage of FIFO is that it can lead to higher taxes during inflation due to lower cost of goods sold.
Questions & Step-by-step Solutions
1 item
Q
Q: What is the primary disadvantage of using the FIFO method?
Solution: The primary disadvantage of FIFO is that it can lead to higher taxes during inflation due to lower cost of goods sold.
Steps: 5
Step 1: Understand what FIFO means. FIFO stands for 'First In, First Out'. This is an inventory method where the oldest items are sold first.
Step 2: Recognize what happens during inflation. Inflation means that prices of goods are rising over time.
Step 3: Know how FIFO affects costs. When using FIFO, the older, cheaper items are sold first, which means the cost of goods sold (COGS) is lower.
Step 4: Understand the tax implications. Lower COGS means that the profit reported is higher, which can lead to higher taxes.
Step 5: Conclude the primary disadvantage. The main disadvantage of FIFO is that it can result in higher taxes during inflation because of the lower cost of goods sold.
