Question

During a period when inventory costs are steadily decreasing, which of the following is true?

		Ending inventory value will be higher under FIFO than under LIFO.
		Income taxes will be lower under FIFO than under LIFO.
		Cost of goods sold will be higher under LIFO than under FIFO.
		Net income will be higher under FIFO than under LIFO.

Answer 1

ANSWER B. Income taxes will be lower under FIFO than under LIFO.

FIFO - WHEN INVENTORY COST ARE DECREASING

WHEN THE INVENTORY COST ARE DECREASING, THE EXISTING INVENTORY WHICH IS AT HIGHER PRICE WOULD BE INVLUDED IN COST OF GOODS SOLD, THEREBY INCREASING COST OF GOODS SOLD, AND THE CURRENT INVENTORY AT LOWER COST WILL BE INCLUDED IN ENDING INVENTORY, LEADING TO LOWER ENDING INVENTORY. THUS THE NET PROFIT WILL ALSO DECREASE, WHICH LEAD TO LOWER INCOME TAXES IN FIFO.

LIFO - WHEN INVENTORY COST ARE DECREASING

THE LOWER COST INVENTORY AT CURRENT PRICES WILL BE SOLD, LEADING TO LOWER COST OF GOODS SOLD. ALSO HIGHER PRICED INVENTORY OF EARLIER HIGHER PRICES WILL REMAIN IN ENDING INVENTORY. THUS THE NET INCOME WILL BE HIGHER AND ACCORDINGLY INCOME TAXES WILL ALSO BE HIGHER UNDER LIFO.