Question

All of the following are advantages of LIFO except

a.a deferral of income tax occurs as long as the price level increases.
b.an approximation of the physical flow of goods is achieved.
c.an improvement of cash flow.
d.recent costs are matched against current revenues.

Answer 1

The question is about the inventory valuation method LIFO where the choice 'an approximation of the physical flow of goods' is not an advantage of LIFO, which typically leads to deferral of income tax, improved cash flow, and matching of recent costs with current revenues.

Step-by-step explanation:

The question pertains to the 'Last In, First Out' (LIFO) method of inventory valuation, which is a common topic in accounting courses. LIFO assumes that the last items placed in inventory are the first sold. Among the given choices, b. an approximation of the physical flow of goods is achieved is not necessarily an advantage of LIFO. Instead, it is often more reflective of a FIFO (First In, First Out) inventory system.

LIFO does typically result in a deferral of income tax in periods of inflation, as the latest and often higher-cost goods are expensed against revenue, reducing taxable income. This can also contribute to an improvement of cash flow since taxes are deferred. Moreover, it does mean that recent costs are matched against current revenues, which can give a better match of expenses with income in the profit and loss account during times of changing prices.