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9. During a period of falling prices, which of the following methods is likely to result...

9. During a period of falling prices, which of the following methods is likely to result in reporting the lowest income tax expense?

a. Average Cost

b. FIFO

c. LIFO

d. Specific Identification

e. None of the above

Business   Accounting   
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Answer #1

The Answer to the question is option b. FIFO

Income tax expense decreases when the Net income decreases or we can say, cost of goods sold increases. Cost of Goods Sold will be higher when FIFO Inventory method is used. In FIFO method, the items that are first purchased are sold first. During a period of falling prices, the goods purchased first will have more cost than others. Therefore, when FIFO is used, Cost of Goods Sold will be higher causing a lower income tax expenses.

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