Allied Products maintains a large inventory. The company has used the LIFO inventory method for many years, during which the purchase costs of its products have risen substantially. (More than one of the following answers may be correct.)
A) Allied would have reported a higher net income in past years if it had been using the average cost method.
B) Allied's financial statements imply a lower inventory turnover rate than they would if the company were using FIFO.
C) If Allied were to let its inventory fall far below normal levels, the company's gross profit rate would decline.
D) Allied would have paid more income taxes in past years if it had been using the FIFO method.

Question

Quizplus · Accepted Answer

D  A) Under the average cost method, the cost of goods sold would be lower than under LIFO when prices are rising, leading to higher net income.  D) Using FIFO in a period of rising prices results in lower cost of goods sold and higher taxable income, leading to higher income taxes.

Allied Products Maintains a Large Inventory