Final answer:
For tax purposes, the Lower of Cost or Market (LCM) method cannot be applied with the Last-In, First-Out (LIFO) cost flow assumption because it could lead to inconsistent inventory valuation and potentially distort taxable income.
Step-by-step explanation:
For tax purposes, the Lower of Cost or Market (LCM) method may not be applied with the Last-In, First-Out (LIFO) cost flow assumption. The Internal Revenue Service (IRS) does not allow taxpayers who use the LIFO method to also apply the LCM rule when valuing inventory for tax purposes. The LCM method allows businesses to value inventory at the lower of the acquisition cost or the current market price, which helps to recognize a loss when the market value falls below the cost. However, LIFO assumes that the most recently acquired items are sold first, potentially lowering the taxable income by matching recent higher costs against current revenues. This mismatch in valuation methods under LIFO does not permit the simultaneous use of LCM, as it could result in inconsistent inventory valuation and potentially distort taxable income.