Question

LIFO, because it gives us a lower cost of goods sold, therefore decreasing your net income and subsequently reducing the amount of taxes you need to pay. It is not allowed under IFRS, but allowed under GAAP. What is the reason for using LIFO inventory method?

1) To increase the cost of goods sold
2) To decrease the net income
3) To increase the amount of taxes to be paid
4) To comply with IFRS regulations

Answer 1

The reason for using LIFO inventory method is to decrease the net income and subsequently reduce the amount of taxes to be paid. LIFO assumes that the most recent inventory purchases are the first ones to be sold, resulting in a higher cost of goods sold. It is allowed under GAAP but not under IFRS. So the correct answer is option 1.

Step-by-step explanation:

The reason for using the LIFO (Last-In, First-Out) inventory method is to decrease the net income. LIFO assumes that the most recent inventory purchases are the first ones to be sold, resulting in a higher cost of goods sold. This reduces the net income and subsequently reduces the amount of taxes that need to be paid.

For example, if a company purchases items at different prices over time and sells them, LIFO assumes that the most recent, more expensive purchases are sold first. As a result, the cost of goods sold is higher, which reduces the net income and the amount of taxes owed.

It is important to note that while LIFO is allowed under the Generally Accepted Accounting Principles (GAAP) in the United States, it is not allowed under the International Financial Reporting Standards (IFRS). This difference in accounting standards is why LIFO may be used to comply with GAAP regulations, but not for IFRS.