Assume that a firm separately determined inventory under FIFO and LIFO and then compared the results

Assume that a firm separately determined inventory under FIFO and LIFO and then
compared the results.

a. In each space below, 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 goods sold LIFO cost of goods 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 goods sold < (less than) LIFO cost of goods 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.