In a period of rising prices, which inventory method typically results in lower taxable income?

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Q: In a period of rising prices, which inventory method typically results in lower taxable income?

Solution: In a period of rising prices, LIFO results in lower taxable income because it matches higher costs against revenues.

Steps: 6

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 a period of rising prices, the cost of the most recently purchased items is higher than older items.
Step 3: When a company uses LIFO, it records the higher costs of the recent purchases as the cost of goods sold (COGS).
Step 4: Since COGS is higher under LIFO, the company's gross profit (revenue minus COGS) will be lower.
Step 5: A lower gross profit leads to lower taxable income because taxes are calculated based on income.
Step 6: Therefore, in a period of rising prices, using LIFO results in lower taxable income compared to other methods like FIFO (First In, First Out).