What is the primary advantage of using the LIFO method?
Practice Questions
1 question
Q1
What is the primary advantage of using the LIFO method?
Higher ending inventory value
Lower tax liability
Easier to manage
More accurate financial reporting
The primary advantage of using LIFO is that it can result in lower tax liability during periods of inflation.
Questions & Step-by-step Solutions
1 item
Q
Q: What is the primary advantage of using the LIFO method?
Solution: The primary advantage of using LIFO is that it can result in lower tax liability during periods of inflation.
Steps: 5
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 happens during inflation. Inflation means that prices are rising over time.
Step 3: Know how LIFO affects costs. When using LIFO, the cost of goods sold (COGS) is based on the most recent, higher prices during inflation.
Step 4: Understand tax implications. Higher COGS means lower profits on paper, which can lead to lower taxes owed.
Step 5: Conclude the primary advantage. The main benefit of LIFO is that it can help a business pay less in taxes when prices are rising.
