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LIFO

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Jim's Music Company uses LIFO for inventory, and the company's profits are quite high this year. The cost of inventory has been steadily rising all year, and Jim is worried about his taxes. You are Jim's accountant and you suggested that the company make a large purchase of inventory to be received during the last week in December. You explained to Jim that this would reduce his income significantly.

1. Jim still doesn't understand the logic of your suggestion. Explain how the purchase would affect taxable income.

2. Is this ethical? Jim is uncertain about the appropriateness of this from a legal and ethical perspective. Give your opinion and explain the ethical implications of making the purchase.

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Solution Summary

Jim's Music Company uses LIFO for inventory, and the company's profits are quite high this year.

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According to LIFO, which means Last in, First Out, the inventory purchased at the last is considered to be used first. In other words, in the current scenario, the purchased made at the end of the year will be shown in the financial statements as being used. Since the cost of the inventory has been rising all over the year and the inventory purchased at the end of the year will obviously be the costliest and purchased at the highest prices, the LIFO method will actually help ...

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Sandeep Bardia, MBA
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  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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