Question

the management of Otto Corp. is considering the effects of various inventory costing methods on its financial statements and its income tax expense. Assuming that the price the company pays for inventory is increasing.

1. Which method will result in the lowest income tax expense?

select a method FIFOAverage Cost MethodLIFO

method will result in the lowest income tax expense.

2. Which method will provide the highest net income?

select a method LIFOFIFOAverage Cost Method

method will provide the highest net income.

3. Which method will provide the highest ending inventory?

select a method LIFOFIFOAverage Cost Method

method will provide the highest ending inventory.

4. Which method will result in the most stable earnings over a number of years?

select a method Average Cost MethodFIFOLIFO

will result in the most stable earnings over a number of years.

Answer 1

When inventory prices are increasing, FIFO provided lowest cost of goods sold, highest net income and highest income taxes.

When inventory prices are increasing, LIFO provided highest cost of goods sold, lowest net income and lowest income taxes.

1
LIFO will result in the lowest income tax expense.
2
FIFO will provide the highest net income.
3
FIFO will provide the highest ending inventory.
4
Average Cost will result in the most stable earnings over a number of years.