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, let's first understand what FIFO and LIFO mean in the context of inventory costing methods.
FIFO stands for "First-In, First-Out." It means that the first inventory items purchased are the first ones sold or used in production. In a rising cost environment, using FIFO assumes that older inventory purchased at lower costs is sold first, resulting in higher-priced inventory remaining on the balance sheet. This can help lower taxes because it results in lower reported profits (due to higher costs of goods sold).
LIFO stands for "Last-In, First-Out." It means that the most recently acquired inventory is sold or used first. In a rising cost environment, using LIFO assumes that the newest inventory purchased, which is more expensive, is sold first. This results in higher costs of goods sold and lower reported profits, which may increase taxes.
Based on this information, the correct statement is:
B. Using LIFO will increase taxes.
Explanation: As the costs of a retailer's merchandise are rising, using LIFO will assume that the more expensive inventory is sold first, resulting in higher costs of goods sold. This reduces the retailer's reported profit, which can lead to higher taxable income and ultimately result in higher taxes.