Question

In inventory management, which accounting method primarily impacts income tax expenses?

a) FIFO (First-In-First-Out)
b) LIFO (Last-In-First-Out)
c) Weighted Average Cost Method
d) Specific Identification Method

Answer 1

The LIFO (Last-In-First-Out) accounting method primarily impacts income tax expenses by leading to lower reported net income during periods of inflation, resulting in reduced income taxes.

Step-by-step explanation:

In inventory management, the accounting method that primarily impacts income tax expenses is b) LIFO (Last-In-First-Out). Under the LIFO method, the last items added to the inventory are considered the first sold. During periods of inflation, the cost of goods sold (COGS) will be higher under LIFO because the more recent, and typically more expensive, inventory costs are recognized. This leads to lower reported net income and thus, lower income taxes. However, it's important to note that LIFO is not permitted for accounting purposes in many countries outside of the US. Alternatives like a) FIFO (First-In-First-Out), c) Weighted Average Cost Method, and d) Specific Identification Method can also be used, each affecting the financial statements differently.