If a company, operating in an inflationary environment, uses FIFO for tax purposes and weighted-average for financial reporting purposes, this will result in a deferred tax asset.

Question

Quizplus · Accepted Answer

This is because in an inflationary environment, the use of FIFO (first-in, first-out) for tax purposes will result in lower cost of goods sold and higher taxable income, while the use of weighted-average for financial reporting purposes will result in higher cost of goods sold and lower net income. As a result, the company will have lower tax payments in the short term, but will eventually have to pay higher taxes when it sells the inventory items at higher prices. This creates a temporary difference between tax and financial reporting and leads to the creation of a deferred tax asset.

If a Company, Operating in an Inflationary Environment, Uses FIFO