ECONOMICS

Detailed explanation-1: -“Because FIFO results in a higher net income during periods of rising prices, it also results in higher income tax expenses, ” Ng said. “Conversely, if the LIFO method is used during a period of rising prices, it will result in lower net income. So, this method would result in a lower income tax expense.”

Detailed explanation-2: -Answer and Explanation: In a period of rising prices, the inventory method which results in the inventory value that is closest to the current cost is the FIFO method. FIFO assumes a company sells old inventory first and that current inventory is what is held at the end of the period.

Detailed explanation-3: -First In, First Out, commonly known as FIFO, is an asset-management and valuation method in which assets produced or acquired first are sold, used, or disposed of first. For tax purposes, FIFO assumes that assets with the oldest costs are included in the income statement’s cost of goods sold (COGS).

Detailed explanation-4: -With FIFO, rising prices do not have an immediate effect on your inventory costs. You hold the more expensive inventory in reserve and use the cheaper inventory first. Your cost of goods sold remains relatively unchanged despite rising inventory prices. You report more income on the income statement and pay more taxes.