Which inventory valuation method is often preferred for tax purposes in times of rising prices?

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Q: Which inventory valuation method is often preferred for tax purposes in times of rising prices?

Solution: LIFO is often preferred for tax purposes as it results in lower taxable income during inflation.

Steps: 6

Step 1: Understand that businesses need to value their inventory, which is the stock of goods they have.
Step 2: Learn about different inventory valuation methods, such as FIFO (First In, First Out) and LIFO (Last In, First Out).
Step 3: Know that during times of rising prices (inflation), the cost of goods sold (COGS) increases.
Step 4: Realize that LIFO means the most recently purchased items are sold first, which are usually more expensive during inflation.
Step 5: Understand that using LIFO results in higher COGS and lower taxable income, which means the business pays less tax.
Step 6: Conclude that because of this tax benefit, LIFO is often preferred for tax purposes when prices are rising.