A firm has used LIFO for several years during which costs have trended higher. If this firm achieves a substantial reduction in inventory quantities in 2017 by selling more merchandise than it purchases, the effect on 2017 net income of the inventory reduction, compared to having no change in inventory quantity from the beginning to the end of 2017, is:
A) net income for 2017 will be greater if the inventory quantity declines.
B) net income for 2017 will be less if the inventory quantity declines.
C) net income for 2017 will not be affected because of the inventory quantity decline.
D)can't tell from the information given.

Question

Quizplus · Accepted Answer

If the firm sells more merchandise than it purchases, the cost of goods sold will increase, which will result in a lower taxable income. Since the firm has been using LIFO during a period of rising prices, the cost of goods sold will be higher than if it used FIFO or average cost. Therefore, if the firm reduces its inventory levels, it will be selling more of the higher-priced inventory items, which will result in a lower cost of goods sold and a higher taxable income. This will, in turn, increase the firm's net income for 2017 compared to having no change in inventory quantity.

A Firm Has Used LIFO for Several Years During Which