The managers of Venice Company receive performance bonuses based on the gross profit of the firm. Which inventory costing method are they likely to favor in periods of declining prices?

Question

Quizplus · Accepted Answer

In periods of declining prices, LIFO (Last-In, First-Out) method of inventory costing is likely to result in a lower gross profit as it values inventory at the higher costs of older inventory items. This leads to a lower taxable income and hence managers may favor LIFO as it reduces their tax liability and increases their performance bonuses. Therefore, choice A) is the likely option for the managers of Venice Company.

The Managers of Venice Company Receive Performance Bonuses Based on the Gross