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Which method would likely result in lower taxes during a period of rising prices
Which method would likely result in lower taxes during a period of rising prices?
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Q1
Which method would likely result in lower taxes during a period of rising prices?
FIFO
LIFO
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LIFO would likely result in lower taxes during rising prices due to higher cost of goods sold.
Questions & Step-by-step Solutions
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Q: Which method would likely result in lower taxes during a period of rising prices?
Solution:
LIFO would likely result in lower taxes during rising prices due to higher cost of goods sold.
Steps: 6
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Step 1: Understand that LIFO stands for 'Last In, First Out'. This means that the most recently purchased items are sold first.
Step 2: Recognize that during a period of rising prices, the cost of the most recently purchased items is higher than older items.
Step 3: When using LIFO, the higher cost of the recent items is used to calculate the cost of goods sold (COGS).
Step 4: A higher COGS means that the company's profit is lower because expenses are higher.
Step 5: Lower profits result in lower taxable income, which means the company pays less in taxes.
Step 6: Therefore, using LIFO during rising prices likely results in lower taxes.
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