Which method would likely result in lower taxes during inflationary periods?
Practice Questions
1 question
Q1
Which method would likely result in lower taxes during inflationary periods?
FIFO
LIFO
Weighted Average
Specific Identification
LIFO would likely result in lower taxes during inflationary periods because it matches higher current costs against revenues.
Questions & Step-by-step Solutions
1 item
Q
Q: Which method would likely result in lower taxes during inflationary periods?
Solution: LIFO would likely result in lower taxes during inflationary periods because it matches higher current costs against revenues.
Steps: 6
Step 1: Understand what LIFO means. LIFO stands for 'Last In, First Out.' This is an inventory method where the most recently purchased items are sold first.
Step 2: Recognize what inflation is. Inflation means that prices are rising, so the cost of goods increases over time.
Step 3: Know how LIFO affects costs. When using LIFO during inflation, the business sells the newer, more expensive inventory first.
Step 4: Understand how this impacts profits. By selling the higher-cost items first, the business reports lower profits because costs are higher.
Step 5: Learn how lower profits affect taxes. Lower profits mean lower taxable income, which results in lower taxes owed.
Step 6: Compare with other methods. Other methods like FIFO (First In, First Out) would sell older, cheaper inventory first, leading to higher profits and potentially higher taxes.
