Under an inflationary environment with stable inventories, a firm may change to FIFO from LIFO due to which of the following reason(s)?
I. To allow earnings manipulation.
II. To improve the reported working capital.
III. To reduce tax drain on cash.
IV. Show a more accurate representation of reported assets than LIFO.
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A. B. C. D.Explanation
Under FIFO, inventory is overstated and hence, working capital is overstated under normal, inflationary conditions. At the same time, COGS is lower than under
LIFO due to rising prices, increasing the taxable income and leading to higher taxes. However, firms cannot manipulate earnings under FIFO by changing purchasing patterns at the end of an accounting period, as it is able to do under LIFO, because FIFO prices are determined by the earliest goods purchased in the inventory.