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The LIFO conformity rule requires that if a company uses LIFO for tax purposes, it must...

The LIFO conformity rule requires that if a company uses LIFO for tax purposes, it must also use LIFO for financial accounting purposes.

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True

False

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Answer #1
  • The given statement is TRUE.
  • If LIFO is used for tax purpose, it must be used for accounting purpose as well.
  • This is because, during the time of rising prices, a company can use LIFO method for tax purpose and as a result the cost of goods sold computed will be higher. This will results in lower gross profit and lower net income, ultimately resulting in Lower Income Taxes.

The company, if there were no LIFO conformity rule, might use FIFO was accounting purpose, and can show higher profits to stockholders and other stakeholders.

  • That’s why LIFO Conformity rule requires a company to use LIFO for accounting purpose also, if it chose to use LIFO for tax purposes.
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