The President and CEO of Quinn Manufacturing receives a cash bonus equal to 1% of audited net income during the current year. During a period of rising prices and increasing inventory, which inventory cost flow assumption would measure the smallest compensation expense and greatest cash position for Quinn Manufacturing?

Question

Quizplus · Accepted Answer

LIFO (Last-In, First-Out) assumes that the last inventory acquired is the first inventory sold, and therefore matches the most recent cost of materials with revenue. In a period of rising prices and increasing inventory, LIFO would measure the smallest compensation expense and the greatest cash position for Quinn Manufacturing because it would result in a higher cost of goods sold, lower net income, and therefore a smaller bonus payout for the CEO. Additionally, LIFO would result in lower taxable income and, therefore, a greater cash position due to lower income taxes paid.

The President and CEO of Quinn Manufacturing Receives a Cash