Assume that a firm separately determined inventory under FIFO and LIFO and then compared the results.
a. In each space that follows, place the correct sign [less than (<), greater than (>), or equal (=)] for each comparison, assuming periods of rising prices.
1. FIFO inventory ________ LIFO inventory
2. FIFO cost of merchandise sold ________ LIFO cost of merchandise sold
3. FIFO net income ________ LIFO net income
4. FIFO income taxes ________ LIFO income taxes
b. Why would management prefer to use LIFO over FIFO in periods of rising prices?
Answer:
a. 1. FIFO inventory > (greater than) LIFO inventory
2. FIFO cost of merchandise sold < (less than) LIFO cost of merchandise sold
3. FIFO net income > (greater than) LIFO net income
4. FIFO income taxes > (greater than) LIFO income taxes
b. In periods of rising prices, the income shown on the company’s tax return would be lower if LIFO rather than FIFO were used; thus, there is a tax advantage of using LIFO.