Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 54

For the following questions, circle the best response.

LIFO

a. is the only method of inventory costing that is allowed for tax purposes.

b. assigns the highest dollar amount to ending inventory when prices are rising.

c. is used in inflationary times to improve net income.

d. is required for financial reporting purposes for firms that use it for tax purposes.

e. presents the best approximation of the underlying value of inventory on the balance sheet.

Step 1 of 2

The cost flow assumption of LIFO or last in first out is necessary for financial reporting reasons for organization’s that use it for tax purposes. LIFO allows the most recent costs incurred for inventory purchased to be used when calculating net income when merchandise is sold.

When prices are rising, FIFO (First in First out) gives ending inventory the highest value and is used during such periods to increase net income.

The correct option is d i.e. LIFO is required for financial reporting purposes by firms that use it for tax purposes.