Which of the following is a disadvantage of the FIFO method?
Practice Questions
1 question
Q1
Which of the following is a disadvantage of the FIFO method?
It can lead to higher taxes.
It is more complex than LIFO.
It does not reflect current market conditions.
It is not allowed under GAAP.
FIFO can lead to higher taxes because it results in higher net income during inflation.
Questions & Step-by-step Solutions
1 item
Q
Q: Which of the following is a disadvantage of the FIFO method?
Solution: FIFO can lead to higher taxes because it results in higher net income during inflation.
Steps: 5
Step 1: Understand what FIFO means. FIFO stands for 'First In, First Out'. It is an inventory management method where the oldest inventory items are sold first.
Step 2: Recognize the context of the question. The question is asking about a disadvantage of using the FIFO method.
Step 3: Consider how FIFO affects financial statements. When prices are rising (inflation), FIFO will show that older, cheaper items are sold first, leading to higher profits.
Step 4: Identify the consequence of higher profits. Higher profits can lead to higher taxes because businesses pay taxes on their net income.
Step 5: Conclude that the disadvantage of FIFO during inflation is that it can result in higher taxes due to higher reported net income.
