Question

Which inventory cost method offers income tax savings during periods of rising prices? a.Weighted average inventory cost method b.FIFO inventory cost method c.Specific identification inventory cost method d.LIFO inventory cost method

Answer 1

Answer:

d. LIFO inventory cost method

Explanation:

Last in first out i.e LIFO inventory cost method refers to the valuation method wherein the last purchased inventory i.e the latest is issued out first.

Under this method, the inventory which is purchased recently is the first to be issued. So in event of rising prices, this would lead to issuing inventory purchased at recent prices i.e high cost first.

This would in turn raise the cost of production and reduce net income. Consequently this would lead to reduced taxes.

Thus, during periods of rising prices or inflation, LIFO offers income tax savings.