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Description: Explain how LIFO generally results in lower income taxes payable when inventory costs are increasing. What is the LIFO conformity rule?

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Explain how LIFO generally results in lower income taxes payable when inventory costs are increasing. What is the LIFO conformity rule?

Principles of Accounting Volume 1

19th Edition

ISBN:9781947172685

Author:OpenStax

Publisher:OpenStax

Chapter10: Inventory

Section: Chapter Questions

Problem 6MC: When would using the FIFO inventory costing method produce higher inventory account balances than...

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Concept explainers

Inventory Valuation

Before discussing the topic inventory valuation let’s discuss the meaning of inventory. In accounting, inventory is also known as stock. Inventory means all the finished goods, materials, merchandise that a business holds for the purpose of selling it in the market with the motive of earning profit.

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Question

Explain how LIFO generally results in lower income taxes payable when inventory costs are increasing. What is the LIFO conformity rule?

Expert Solution

Step 1

LIFO is the Last in First Out inventory method in which inventory purchased at the last will be sold first by the business.

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Similar questions

When would using the FIFO inventory costing method produce higher inventory account balances than the LIFO method would? A. inflationary times B. deflationary times C. always D. never
In rimes of rising prices, the inventory cost method that will yield the highest cost of goods sold is (a) LIFO. (b) weighted-average. (c) FIFO. (d) none of the above.
If inventory is being valued at cost and the price level is steadily rising, which of the three methods of costing—FIFO, UFO, or weighted average cost—will yield the lowest an nual income tax expense? Explain.
Which one of the following statements is true? a. Income manipulation is difficult under LIFO.b. Accounting principles do not require that the inventory cost flow approximate the physical flow of goods.c. Companies may use LIFO for tax purposes and FIFO in the financial statements.d. In periods of declining prices, LIFO will result in the payment of less income taxes.
Indicate whether a company interested in minimizing its income taxes should choose the FIFO orLIFO inventory costing method under each of the following circumstances.a. Declining costs _____b. Rising costs _____
If inventory is being valued at cost and the price level is steadily rising, which of the three methods of costing— FIFO, LIFO, or weighted average cost—will yield the lowest annual income tax expense? Explain.
With inflation, what are the implications of using LIFO and FIFO inventory methods? How do they affect the cost of goods sold?
Which inventory method will result in lower net income in a period of rising prices? Which inventory method will result in lower net income in a period of falling prices?
Under the LIFO cost flow assumption during a period ofinflation, which of the following is false? A. Cost of goods sold will be lower than under FIFO B. Gross margin will be lower than under FIFO C. Income tax expense will be lower than under FIFO D. Ending inventory will be lower than under FIFO
What is the dollar-value method of LIFO inventory valuation?What advantage does the dollar-value methodhave over the specific goods approach of LIFO inventoryvaluation? Why will the traditional LIFO inventory costingmethod and the dollar-value LIFO inventory costingmethod produce different inventory valuations if thecomposition of the inventory base changes?
n a period of rising prices, which method would yield the lowest ending inventory, highest net income and the lowest amount of income taxes?
Which cost flow assumption generally results in the highest reported amount of net income when inventory costs are rising? Explain.