In an inflationary economy, many firms use the ________ method of inventory valuation to reduce distortion of profits.

Question

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LIFO (last-in, first-out) method assumes that the most recent inventory purchased is sold first. In an inflationary economy, the cost of purchasing inventory may increase over time, leading to higher cost of goods sold and lower profits. LIFO reduces this distortion by assigning the higher cost of recently purchased inventory to cost of goods sold, which lowers the reported profits. Therefore, firms may prefer LIFO over other inventory valuation methods, such as FIFO, to mitigate the impact of inflation on their financial statements.

In an Inflationary Economy, Many Firms Use the ________ Method