if the costs of a retailers merchindise are rising,which of the following statements is true?
a. using FIFO will lower taxes
B. using LIFO will increase taxes
To determine which statement is true regarding the cost of a retailer's merchandise rising, we need to understand how different inventory costing methods impact taxes.
FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) are two common inventory costing methods.
FIFO assumes that the first inventory items purchased or produced are the first ones sold. This means that the most recent or current inventory is left unsold, and the cost of goods sold (COGS) is calculated using the oldest cost.
LIFO, on the other hand, assumes that the most recent inventory purchased or produced is the first to be sold. This means that the cost of goods sold reflects the most recent cost of inventory.
Now, let's analyze the statements:
a. Using FIFO will lower taxes:
When merchandise costs are rising, using FIFO will result in a lower reported cost of goods sold (COGS) compared to LIFO. Since taxes are often calculated based on the reported COGS, lower COGS means lower taxable income, thereby potentially lowering taxes. Therefore, Statement A is true.
b. Using LIFO will increase taxes:
When merchandise costs are rising, using LIFO will result in a higher reported cost of goods sold (COGS) compared to FIFO. With higher COGS, the taxable income will be higher, and this can potentially increase the taxes owed. Therefore, Statement B is also true.
In summary, both statements are true. Using FIFO will lower taxes, while using LIFO will increase taxes when the costs of a retailer's merchandise are rising. The choice between FIFO and LIFO can have a significant impact on a retailer's tax liability.