In a period of inflation, which method would likely result in lower taxes?
Practice Questions
1 question
Q1
In a period of inflation, which method would likely result in lower taxes?
FIFO
LIFO
Weighted Average
None of the above
LIFO (Last In, First Out) would likely result in lower taxes during inflation because it matches the most recent, higher costs against revenues.
Questions & Step-by-step Solutions
1 item
Q
Q: In a period of inflation, which method would likely result in lower taxes?
Solution: LIFO (Last In, First Out) would likely result in lower taxes during inflation because it matches the most recent, higher costs against revenues.
Steps: 7
Step 1: Understand what inflation means. Inflation is when prices of goods and services increase over time.
Step 2: Learn about inventory methods. Businesses can use different methods to account for their inventory costs.
Step 3: Know the two common methods: FIFO (First In, First Out) and LIFO (Last In, First Out).
Step 4: With FIFO, the oldest costs are used first, which means lower costs are matched against current revenues during inflation.
Step 5: With LIFO, the newest costs are used first, which means higher costs are matched against current revenues during inflation.
Step 6: Realize that using LIFO during inflation results in higher expenses on paper, which lowers taxable income.
Step 7: Conclude that LIFO would likely result in lower taxes during inflation because it accounts for the higher recent costs.
