Final answer:
Companies with increasing cost inventories tend to choose the LIFO cost flow assumption for both tax and financial reporting purposes due to the LIFO conformity rule, which provides a tax advantage during periods of inflation by showing higher costs of goods sold and lower profits.
Step-by-step explanation:
The LIFO conformity rule refers to a requirement set by the Internal Revenue Service (IRS) that if a company uses the Last-In, First-Out (LIFO) method for tax reporting, it must also use LIFO for financial reporting to shareholders. When a company experiences increasing cost inventories due to factors like greater quantities of inputs needed or the law of increasing opportunity cost, it implies that each additional unit of output costs more to produce. In such cases, LIFO typically results in higher costs of goods sold and lower ending inventory valuations on the balance sheet, leading to lower taxable income and, therefore, lower taxes in periods of rising prices.
Consequently, companies with increasing cost inventories usually prefer LIFO for both tax purposes and financial reporting, as this can provide a tax advantage during times of inflation. It is important to note that while LIFO can reduce taxable income when costs are rising, it can also result in lower reported profits to investors.