Question

Mast Co. converted from the FIFO method for inventory valuation to the LIFO method for financial statement and tax purposes. During a period of inflation, would Mast’s ending inventory and income tax payable using LIFO be higher or lower than FIFO?

Answer 1

Answer:

During a period of inflation, Mast’s ending inventory and income tax payable will be higher using LIFO than FIFO.

Explanation:

In a period of inflation the closing inventory will be higher because of increase in price. In LIFO the oldest unit is sold first and the last purchased remains in the inventory.  So Closing inventory is higher which decrease the Cost of goods sold and Increase in profit and ultimately Increase in Taxes as well. In FIFO the Newest unit is sold first and the oldest unit purchased remains in the inventory.  So closing inventory is lower which increase the Cost of goods sold and decrease in profit and ultimately decrease in Taxes as well.