What is the primary disadvantage of using LIFO for inventory valuation?
Practice Questions
1 question
Q1
What is the primary disadvantage of using LIFO for inventory valuation?
Lower net income
Higher taxes
Complexity in record-keeping
All of the above
The primary disadvantages of LIFO include lower net income, higher taxes, and complexity in record-keeping.
Questions & Step-by-step Solutions
1 item
Q
Q: What is the primary disadvantage of using LIFO for inventory valuation?
Solution: The primary disadvantages of LIFO include lower net income, higher taxes, and complexity in record-keeping.
Steps: 4
Step 1: Understand what LIFO means. LIFO stands for 'Last In, First Out.' This means that the most recently purchased items are sold first.
Step 2: Recognize that when prices are rising, LIFO can lead to lower reported profits. This is because the cost of the newer, more expensive items is used to calculate the cost of goods sold.
Step 3: Realize that lower profits can lead to higher taxes. If a company shows less income, it may pay less in taxes, but this can also be a disadvantage if investors are looking for strong profits.
Step 4: Acknowledge that LIFO can make record-keeping more complicated. Companies need to track the cost of each batch of inventory separately, which can be time-consuming and complex.
