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    Question

    Which of the following inventory methods would reduce tax liability during inflationary period?

    A LIFO (last in first out) Correct Answer Incorrect Answer
    B FIFO (first in first out) Correct Answer Incorrect Answer
    C Weighted average cost Correct Answer Incorrect Answer
    D B or C Correct Answer Incorrect Answer
    E A or C Correct Answer Incorrect Answer

    Solution

    Methods of inventory are: ·         FIFO – First In First Out – under this method the inventory bought first will be sold first and the closing stock left is from the last purchases ·         LIFO – Last In First Out – under this method the inventory bought last will be sold first and the closing stock left is more from the first purchases. ·         Weighted Average Cost – Cost per unit of inventory will be the weighted average of cost where weights will be the quantity. To reduce tax liability, a company needs to reduce profit and increase costs. by using LIFO method , the cost of inventory would be higher as the price of last purchases would be higher under inflationary period. Using it would lead to higher cost. This will reduce the profit and therefore also reduce the tax liability of the company.

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