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Jim's Music Company: LIFO for inventory

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.

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

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.

Solution Preview

First, it might be helpful to explain what LIFO means.

In accounting, LIFO has historically been used to record the value of inventory. Since prices generally rise over time, this method records the sale of the most expensive inventory and thereby can reduce taxes. However, this method rarely reflects the underlying commercial substance (perhaps a heap of coal with ...

Solution Summary

In just under 250 words, this solution discusses the concept of the LIFO method and how it applies to inventory. Furthermore, this response addresses the ethical and legal perspectives of this method as well.