Question

If a company uses LIFO, a LIFO liquidation causes a company's income taxes to increase:_______

a. When inventory purchase costs are rising.
b. LIFO liquidations have no effect on a company's income taxes.
c. Whether inventory purchase costs are declining or rising.
d. When inventory purchase costs are declining.

Answer 1

Answer: a. When inventory purchase costs are rising.

Explanation:

Last In First Out is an inventory stock valuation method where newer inventory is sold first and older inventory are sold last.

When a LIFO liquidation occurs, it means that the company has sold off its new stock and are now selling the older one.

This will lead them to have a lower cost of goods sold as the older stock is usually cheaper. If Inventory purchase costs are increasing in the market, then sales prices will have to increase as well. The company will sell at this new price but will still have that lower cost of goods sold.

This means that they would have more profits as a result which will lead to more taxes being charged on them.