Question

Question 1 - Even though LIFO may not reflect the physical flow of goods, why might companies adopt LIFO inventory costing in periods when costs are consistently rising?
Question 2 - If inventory costs are rising, which inventory costing method—first-in, first-out; last-in, first-out; or average cost—yields the (a) lowest ending inventory? (b) lowest net income? (c) largest ending inventory? (d) largest net income? (e) greatest cash flow, assuming the same method is used for tax purposes?

Answer 1

Answer-1) Last in, first out (LIFO) is an inventory method that assigns latest costs of the goods produced or purchased in the computations of cost of goods sold. When the costs are increasing consistently it will cause a higher amount of cost of goods sold on the income statement and thus results to a lower gross profit. It allows the firms to save on the taxes and making a better measurement of their revenue with the latest costs. Moreover alleviate the overstatement of profit therefore providing a more accurate picture on an improvement in cash flows.

As per policy we have to answer first question