BUISENESS MANAGEMENT
MERCHANDISING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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It reduces the risk of spoilage.
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It results in lower tax liability during inflation.
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Record keeping is simple under this method.
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This method involves no complex calculations.
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Detailed explanation-1: -The biggest benefit of LIFO is a tax advantage. During times of inflation, LIFO results in a higher cost of goods sold and a lower balance of remaining inventory. A higher cost of goods sold means lower net income, which results in a smaller tax liability.
Detailed explanation-2: -Through LIFO, the main advantage lies in reporting lower profits, getting around financial analysis. It is more apt for cash accounting, inventory purchase, matching cost revenue figures and allowing a complete recovery of material cost. It helps to validate the published financials and the income statement.
Detailed explanation-3: -During periods of inflation, the use of FIFO will result in the lowest estimate of cost of goods sold among the three approaches, and the highest net income.
Detailed explanation-4: -FIFO (first in, first out) inventory management seeks to value inventory so the business is less likely to lose money when products expire or become obsolete. LIFO (last in, first out) inventory management is better for nonperishable goods and uses current prices to calculate the cost of goods sold.