Which method would likely result in higher taxes during periods of inflation?
Practice Questions
1 question
Q1
Which method would likely result in higher taxes during periods of inflation?
FIFO
LIFO
Weighted Average
None of the above
FIFO would result in higher taxes during inflation because it reports higher profits due to lower cost of goods sold.
Questions & Step-by-step Solutions
1 item
Q
Q: Which method would likely result in higher taxes during periods of inflation?
Solution: FIFO would result in higher taxes during inflation because it reports higher profits due to lower cost of goods sold.
Steps: 7
Step 1: Understand what FIFO means. FIFO stands for 'First In, First Out.' This is an inventory method where the oldest inventory items are sold first.
Step 2: Know what inflation is. Inflation means that prices are rising over time, which can affect the cost of goods.
Step 3: Learn about cost of goods sold (COGS). COGS is the total cost of producing goods that a company sells. It affects profit calculations.
Step 4: Realize how FIFO affects COGS during inflation. Under FIFO, the older, cheaper inventory costs are used to calculate COGS, leading to lower COGS.
Step 5: Understand how lower COGS affects profits. With lower COGS, the profits reported by the company are higher.
Step 6: Connect higher profits to taxes. Higher profits usually mean that a company will pay more in taxes.
Step 7: Conclude that during inflation, using FIFO leads to higher taxes because it results in higher reported profits due to lower COGS.
