Question

Which of the following is not considered an advantage of last-in, first-out when prices are rising?

Select one:

A. Overstated inventory

B. The more recent costs are matched against current revenues.

C. There will be a deferral of income tax.

D. A company's future reported earnings will not be affected substantially by future price declines.

Answer 1

Answer: A. Overstated Inventory

As the price of the product is raising, LIFO method of valuation of inventory has several advantages which inclucde:

B) The recent cost of raw materials are matched with the revenues since expensive raw materials are used immediately and are sold since what come in in the last goes out first in LIFO method.

C) The income tax shall be deferred since the cost of raw materials is high leading to lower net profits on which the income tax shall be applicable.

D) Even if the price declines in future, there shall be no loss since the costly products are utilized at the earliest.

An overstated inventory balance is never an advantage of LIFO method of valuation of inventory in cases when the price of the product is raising.