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Chapter 8 discussion - During a period of steadily...

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During a period of steadily increasing purchase costs, which inventory flow assumption results in the highest reported profits? The lowest taxable income? The valuation of inventory that is closest to current replacement cost? Briefly explain your answers. In the FIFO method, oldest purchases are allocated to COGS first, while the current higher costs remain in the inventory. By assigning lower costs to the income statement, the businesses tend to report somewhat of higher profits, resulting in high tax payments. On other hand, LIFO method is the most controversial flow assumption method. In this method, the costs of the most recent (higher costs) purchases are allocated to the income statement. With the use of this method the income is based on most current market conditions, i.e. current sales revenue are offset by current cost of the merchandise sold. By doing so, the business reports lower profits resulting in low taxable income.
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