If the cost of a retailer's merchandise are rising, is this a trues statment?
Using FIFO will lower taxes
To determine if the statement is true, let's break it down:
1. Cost of merchandise is rising: If the cost of a retailer's merchandise is increasing, it means they are paying more to acquire the goods they sell.
2. Using FIFO (First-in, First-out) will lower taxes: FIFO is an inventory accounting method where the oldest inventory items are sold first. When the cost of merchandise is rising, using FIFO can result in lower taxable income and potentially lower taxes.
Explanation of how FIFO affects taxes:
When applying FIFO, the oldest and typically the cheapest inventory is sold first. This means that the cost of goods sold (COGS) reported on the financial statements will be lower compared to other inventory costing methods like LIFO (Last-in, First-out).
A lower COGS reduces the business's gross profit, resulting in lower taxable income. Consequently, the tax liability will also decrease, as taxes are usually calculated based on the taxable income.
However, it's important to note that while FIFO can help lower taxes in certain situations, it may not always be the most accurate reflection of a retailer's inventory and profitability. Different inventory costing methods have their own advantages and disadvantages, and the choice of method depends on various factors, including industry norms, tax regulations, and specific business circumstances.
In summary, the statement "Using FIFO will lower taxes if the cost of a retailer's merchandise is rising" is generally true, as long as the retailer's inventory valuation is higher under FIFO compared to other costing methods.