If a company uses LIFO, a LIFO liquidation is problematic for a company's income taxes:
A)When inventory purchase costs are rising.
B)When inventory purchase costs are declining.
C)Whether inventory purchase costs are declining or rising.
D)LIFO liquidations are not problematic for a company's income taxes.When costs are rising, a liquidation causes pre-tax income and income taxes to rise.

Question

Quizplus · Accepted Answer

If a company uses LIFO and inventory purchase costs are rising, a LIFO liquidation can cause pre-tax income and income taxes to rise, making it problematic for the company's income taxes. This is because LIFO assumes that the most recently purchased inventory is sold first, which means that when there is a liquidation (i.e. the sale of older inventory), the cost of goods sold is lower, and the company's profits appear higher. This can result in higher income taxes.

If a Company Uses LIFO, a LIFO Liquidation Is Problematic