Question

Why are some U.S. companies opposed to the elimination of the LIFO inventory method?

a. Inventory amounts are more difficult to calculate under FIFO

b. LIFO most likely matches actual flow of inventory

c. Increased tax burden

d.Most international companies use LIFO

Answer 1

According to LIFO method, inventory which is bought at the latest, is sold first. Thus the ending inventory consists of the inventory which was purchased earlier. It is generally assumed that over a period of time, prices of goods tend to increase. Hence, inventory purchased latest at the higher price, becomes part of the cost of goods sold as per LIFO method. Thus cost of goods sold increases and thus lower profits are recorded in the income statement. In this way, due to the use of LIFO method, income tax liability of the companies tend to decrease.

Hence, if LIFO is eliminated, tax burden of the companies will increase.

Hence, some U.S. companies are opposed to the elimination of the LIFO inventory method due to increased tax burden.

Correct option is (c)

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