Final Answer:
The answer is true because the Last-In, First-Out (LIFO) inventory valuation method assumes that the most recently acquired inventory is sold first. In a period of rising prices, this results in a higher cost of goods sold (COGS) under methods like First-In, First-Out (FIFO) or weighted-average, compared to LIFO.
Step-by-step explanation:
In a period of rising prices, the Last-In, First-Out (LIFO) method results in lower taxable income compared to the First-In, First-Out (FIFO) or weighted-average methods. LIFO assumes that the most recently acquired inventory is sold first, which matches the higher current prices during inflation. Consequently, the cost of goods sold (COGS) under LIFO reflects these lower historical costs, leading to a lower reported profit and, consequently, lower income taxes.
To illustrate, consider a scenario where a company sells 100 units of a product. If the most recent cost under LIFO is $10 per unit, while under FIFO, it is $12, the COGS under LIFO would be $1,000, and under FIFO, it would be $1,200. The lower COGS results in a higher gross profit under LIFO, leading to lower taxable income and, ultimately, lower income taxes. This strategic tax advantage during inflationary periods is a key reason why companies may opt for the LIFO method.
The tax-saving benefits of LIFO are especially pronounced during periods of rising prices when the replacement cost of inventory is higher. By matching lower historical costs with current high prices, LIFO provides a tax advantage that can positively impact a company's financial performance and cash flow. Therefore, in a period of rising prices, the statement is indeed true.