Question

In periods of rising prices when lifo is used, companies avoid reporting a ________ because a portion of the gross profit must be reinvested to purchase more expensive inventory items.

Answer 1

By the use of Lifo in a period where the prices rise, companies avoid to report paper profit, also called phantom profit, as economic gain. Have in mind that in periods of changing prices, the cost flow assumption can have a significant impact onincome and on evaluations based on income. That is why when Lifo is used the companies tend to report the lowest net income