Under an inflationary environment with stable inventories, a firm may change to LIFO from FIFO due to which of the following reason(s)?
I. To allow earnings manipulation.
II. To improve the reported current ratio.
III. To reduce tax drain on cash.
IV. Show a more accurate representation of reported assets than FIFO.
Click on the arrows to vote for the correct answer
A. B. C. D.C
Under LIFO, inventory is understated and hence, current ratio is understated under normal, inflationary conditions. At the same time, COGS is larger than under
FIFO due to rising prices, reducing the taxable income and leading to lower taxes. Further, firms can manipulate earnings under LIFO by changing purchasing patterns at the end of an accounting period. This happens because the LIFO COGS is determined by the prices of the latest goods purchased.