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First In First Out (FIFO) versus Last In First Out (LIFO)

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An accounting intern for a local CPA firm was reviewing the financial settlements of a client in the eletronics industry. The intern noticed that the client used the FIFO method of determing ending inventory and cost of goods sold. When she asked a colleague why the firm used FIFO instead of LIFO, she was told that the client used FIFO to minimize its income tax liability. This response puzzled the intern because she thought that LIFO would minimize income tax liability.

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What would you tell the intern to resolve the confusions?

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Solution Summary

First in first out (FIFO) versus last in first out (LIFO) is examined.

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In case of FIFO method of determining ending inventory and in case of inflation, the goods first purchased will be issued for production first. Therefore, the cost of goods sold will be less and the profit will be more and the income tax liability will be ...

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