Question

1. The use of LIFO during a long inflationary period can result in:

Significant cash flow advantages over FIFO.

A reduction in inventory turnover over FIFO.

A net increase in income tax expense.

An inflated balance sheet.

2. If a company uses LIFO, a LIFO liquidation causes a company's income taxes to increase:

Whether inventory purchase costs are declining or rising.

When inventory purchase costs are declining.

LIFO liquidations have no effect on a company's income taxes.

When inventory purchase costs are rising.

Answer 1

1. The use of LIFO during a long inflationary period can result in:

   - can result in Significant cash flow advantages over FIFO.

This is because there different ta benefits.

2. If a company uses LIFO, a LIFO liquidation causes a company's income taxes to increase:

   - When inventory purchase costs are rising.

Due to Lifo liquidation, Older, low cost inventory is sold resulting in a lower cost of goods sold, higher net income, and higher taxes.