Final answer:
The primary inventory cost-flow methods used for tax purposes are FIFO (First-In, First-Out), LIFO (Last-In, First-Out), Weighted Average, and Specific Identification. FIFO and LIFO are the most common for tax purposes due to their impact on taxable income, with FIFO leading to lower cost of goods sold and LIFO to higher cost of goods sold in a period of rising prices.
Step-by-step explanation:
The primary inventory cost-flow methods used for tax purposes are:
- FIFO (First-In, First-Out)
- LIFO (Last-In, First-Out)
- Weighted Average
- Specific Identification
For tax purposes, businesses commonly use FIFO or LIFO. FIFO assumes that the oldest inventory items are sold first, potentially resulting in lower cost of goods sold and higher taxable income when prices are rising. LIFO, on the other hand, assumes the most recently purchased or produced items are sold first, leading to higher cost of goods sold and lower taxable income under the same conditions. The Weighted Average cost method smooths out price fluctuations by averaging the cost of inventory. Specific Identification is used when tacking individual items, often for unique or expensive items.
Companies choose an inventory accounting method based on various factors like financial, tax, and operational considerations. In some jurisdictions, tax regulations can influence the choice between FIFO and LIFO to optimize tax liabilities. Whichever method is chosen, it must be consistently applied and accurately reflect income. It's also important to note that some methods like LIFO are not allowed under International Financial Reporting Standards (IFRS).