Question

By using the LIFO method of inventory accounting, a company like Exxon: a) will report lower earnings during rising prices of inputs and pay lower taxes. b) will report higher earnings during rising prices of inputs and pay higher taxes. c) will report its inventory on its balance sheet at current prices. d) will overvalue its inventory on its balance sheet when prices of inputs are rising.

Answer 1

a) will report lower earnings during rising prices of inputs and pay lower taxes

The reason for this is that when input prices are rising, the inventory bought last is the most expensive and the inventory bought first is the least expensive. So when using LIFO during rising prices of inputs the company will report a higher cost of goods sold as the inputs bought later cost more. This will lower their earnings and taxes.

Step-by-step explanation: