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Which method would likely result in lower taxes during periods of rising prices?

Practice Questions

Q1
Which method would likely result in lower taxes during periods of rising prices?
  1. FIFO
  2. LIFO
  3. Weighted Average
  4. Specific Identification

Questions & Step-by-Step Solutions

Which method would likely result in lower taxes during periods of rising prices?
  • 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 during periods of rising prices, the cost of the most recently purchased items is higher than older items.
  • Step 3: When using LIFO, the higher cost of the recently purchased items is used to calculate the Cost of Goods Sold (COGS).
  • Step 4: A higher COGS reduces the company's taxable income because taxes are calculated on profits (Revenue - COGS).
  • Step 5: Therefore, using LIFO during rising prices results in lower taxable income and, consequently, lower taxes.
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