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.

Question

Quizplus · Accepted Answer

LIFO (Last-In First-Out) assumes that the latest inventory purchased is sold first. In the event of a LIFO liquidation, older (lower cost) inventory is sold, resulting in higher profits and, as a result, higher taxable income. This is problematic when inventory purchase costs are rising because the cost of goods sold will be lower than the current cost of ending inventory, resulting in a lower taxable income. This can lead to a higher tax liability for the company.

If a Company Uses LIFO, a LIFO Liquidation Is Problematic