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Which method is generally preferred for tax purposes in an inflationary environm
Which method is generally preferred for tax purposes in an inflationary environment?
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Practice Questions
1 question
Q1
Which method is generally preferred for tax purposes in an inflationary environment?
FIFO
LIFO
Weighted Average Cost
Specific Identification
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LIFO is often preferred for tax purposes during inflation as it results in lower taxable income due to higher COGS.
Questions & Step-by-step Solutions
1 item
Q
Q: Which method is generally preferred for tax purposes in an inflationary environment?
Solution:
LIFO is often preferred for tax purposes during inflation as it results in lower taxable income due to higher COGS.
Steps: 6
Show Steps
Step 1: Understand that LIFO stands for 'Last In, First Out'. This means that the most recently purchased items are sold first.
Step 2: Recognize that in an inflationary environment, prices of goods are rising.
Step 3: When using LIFO, the cost of goods sold (COGS) will reflect the higher prices of the most recently purchased items.
Step 4: Higher COGS means that the business will report lower profits.
Step 5: Lower profits lead to lower taxable income, which means the business pays less in taxes.
Step 6: Therefore, businesses often prefer LIFO during inflation to minimize their tax burden.
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