If it’s assumed that over a time period prices are rising, which inventory identification method would result in a lower tax bill for a company, assuming all other inputs are equal?
Explanation
Answer - B - LIFO-or last-in-first-out-is the inventory identification method that would result in a lower tax bill.
Key Takeaway: Assuming that the first product in inventory will cost less than the last in-for example, a widget in January 2001 would cost $10, while in January 2002 it would cost $12-gross profit would be matched against the more expensive items in the inventory for LIFO, meaning the widget that was purchased later for $12. That would reduce the net profit of the business, resulting in a lower tax bill. For businesses and inventory that are expected to grow over time, LIFO is generally preferable for this reason. Note: It is for this reason that the IRS tends not to like the LIFO method. A special tax form needs to be filed if it is used. A tax consultant can provide more information.
