When prices are rising, a company using the FIFO costing method will generally pay less taxes than if the company had been using the LIFO method.

Question

Quizplus · Accepted Answer

When prices are rising, the cost of goods sold using the FIFO method will include the older, lower-priced inventory, resulting in a higher gross profit and higher taxable income. On the other hand, the LIFO method will match the higher priced inventory with the cost of goods sold, resulting in a lower gross profit and lower taxable income. Therefore, a company using the LIFO method will generally pay less taxes than if the company had been using the FIFO method.

When Prices Are Rising, a Company Using the FIFO Costing