Which of the following is(are) true regarding cost flow assumptions?
A) Manufacturing firms are required to use FIFO.
B) Service firms are required to use LIFO.
C) If a firm uses FIFO for tax purposes, then FIFO must be used for financial reporting purposes.
D)If a firm uses LIFO for tax purposes, then LIFO must be used for financial reporting purposes.
E) All of the above.

Question

Quizplus · Accepted Answer

While A and B are not true, C and D are partially true but not entirely accurate. The Internal Revenue Service (IRS) allows firms to choose their own cost flow assumptions for tax purposes, but they must be consistent in their use from year to year. However, the Financial Accounting Standards Board (FASB) requires firms to follow specific guidelines for financial reporting, which includes allowing the use of various cost flow assumptions, such as FIFO, LIFO, or weighted average. Therefore, firms may use different cost flow assumptions for tax purposes and financial reporting purposes, but there may be tax consequences to choosing different methods.

Which of the Following Is(are) True Regarding Cost Flow Assumptions