In a period of falling prices, which inventory method would result in the lowest tax burden?
A) Average-cost.
B) FIFO.
C) No difference.
D) Cannot be determined.

Question

Quizplus · Accepted Answer

In a period of falling prices, using the FIFO (first in, first out) method of inventory accounting would result in the lowest tax burden because it assumes that the oldest units of inventory are sold first, resulting in a higher cost of goods sold and a lower taxable income. This method, therefore, matches lower-taxed or non-taxed old inventory costs against higher-priced new inventory sales, reducing taxable profits. The average-cost method assumes a weighted average unit cost of all inventory is sold, and it may not reflect actual inventory costs, resulting in higher taxable income. So, FIFO is the best choice in a period of falling prices for minimizing the tax burden.

In a Period of Falling Prices, Which Inventory Method Would