Question

For inventory with decreasing costs, which cost flow assumption is most often used for both the tax return and financial statements?

Answer 1

The Last-In, First-Out (LIFO) method is the most common cost flow assumption used for tax returns and financial statements in industries with decreasing costs.

Step-by-step explanation:

For inventory with decreasing costs, the cost flow assumption most often used for both tax returns and financial statements is the Last-In, First-Out (LIFO) method. Under LIFO, it is assumed that the most recently purchased items are sold first. When costs are decreasing, LIFO results in a higher cost of goods sold (COGS), which reduces taxable income and thereby tax liability, while also presenting a lower-value inventory on the balance sheet. However, it's important to note that LIFO is not accepted under International Financial Reporting Standards (IFRS).

In industries such as high-tech where falling average total costs are due to technological improvements or increased education of employees, companies may choose to apply this assumption to accurately reflect the impact of cost changes on their financial reporting. The use of LIFO in such industries with decreasing costs can better match revenue with the cost of goods sold.