Flynn Company Uses LIFO for Tax Purposes and External Reporting

Question

Examlex · Accepted Answer

The Answer is a. The LIFO conformity rule requires a company to use LIFO for external reporting if they use LIFO for tax purposes.
b. A company may not think LIFO provides a faithful representation of inventory cost flows. As a result, they want to use FIFO for internal reporting.
c. A company's inventory flows may not follow the LIFO assumption of last goods in are the first out. A company's inventory flows may more closely follow FIFO.
d. A company may want to reduce the amount taxes paid so they use LIFO for tax purposes. LIFO offers tax advantages over other methods when costs are increasing and inventory levels are stable.
e. A company may want to conserve cash so they use LIFO for tax purposes because less cash is paid for taxes.
f. A company may be following a historical pattern of using FIFO internally. Management may be more comfortable using FIFO for decision making.
g. Record keeping using LIFO may be difficult because the latest purchase cost may not be available if purchased goods are in transit at the end of a period.
h. A company may have different goals and objectives. A company may want to minimize the taxes paid so it uses LIFO for tax purposes. At the same time, the company may want to approximate the actual flow of costs to more accurately understand operations, and as a result, uses FIFO for internal reports.

Flynn Company Uses LIFO for Tax Purposes and External Reporting

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