Question

LIFO ADVANTGAE

With increasing purchase prices, LIFO yields the _________________, reduce tax, and thus improve cash flows

Answer 1

LIFO method allows companies to reduce taxable income and improve cash flows by valuing inventory based on recent purchases.

Step-by-step explanation:

The subject of this question is Business as it is related to financial accounting and tax planning.

The advantage of using LIFO (Last-In, First-Out) method in accounting is that it allows companies to reduce their taxable income by valuing their inventory based on the assumption that the most recent purchases are sold first. This results in a lower cost of goods sold and lower profits, leading to reduced tax liabilities and improved cash flows.

For example, assume a company purchases goods at $10 each in January and then at $15 each in February. If it sells 10 units in March, under LIFO, it will assume the units sold were purchased in February, costing $15 each, resulting in a higher cost of goods sold and a lower taxable income compared to FIFO (First-In, First-Out) method.