Which method (FIFO or LIFO) would be preferred for income tax purposes in periods of declining prices? WHY?

Answer 1

In periods of declining prices, each shipment of merchandize you purchase would cost less than the previous shipment, so if your cost formula was FIFO, you'd be valuing your ending inventory at the most recent (lower) costs, resulting in a lower ending inventory, and therefore higher COGS and lower profit, thereby resulting in a lower tax to be paid.

Answer 2

The other respondants are generally correct - LIFO allows you to account for the inventory that is consumed at lower prices. The only additional consderations is if prices of the product and the raw materials both going down at the same rate?

Good luck.

Answer 3

Taking Financial Accounting are we? LIFO would be preferred because according to Last In First Out, the last product to hit the shelf would be cheaper---since prices are falling. If you chose First In First Out, you would be buying products at the old, higher prices.

Answer 4

well, LIFO (last in first out) would be based on a lower cost which would add more profits...

FIFO (first in first out) is based on the now prices and profit margin would be lower...

Depends on the business in order to use which one.. if your business is slow you may want to consider LIFO or fast the other one...