Question

N 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.

a.paper profit
b.gross profit
c.net lossa
d.net income

Answer 1

A is the most correct answer. With a paper profit, the company will report having much more income than it actually has on-hand, and would then require them to invest much of that (invisible, for the purposes of the business) income back into items that they could likely not afford.