Which inventory cost flow assumption results in the highest tax expense in a period of inflation?
A) Retail method
B) FIFO
C) Average cost
D) Specific identification
E) Moving weighted average

Question

Quizplus · Accepted Answer

In a period of inflation, the FIFO (first-in, first-out) method results in the highest tax expense because it assumes that the first items purchased are the first items sold. This means that the cost of goods sold reflects the higher costs of inventory purchased more recently, resulting in a higher cost of goods sold and therefore a lower net income. As a result, the company has a higher tax expense.

Which Inventory Cost Flow Assumption Results in the Highest Tax