Oliver & Co

question 93

Multiple Choice

Oliver & Co.has been in business for 15 years.During that time,the company has consistently used the LIFO inventory costing method.Because of inflation,purchase prices for merchandise have increased consistently over the 15 years.The company has maintained the same inventory quantities over the 15 years.What is the effect of this accounting choice?

• A) The company's total net income for the past 15 years is greater than it would have reported using another inventory method.
• B) The company will have paid more income taxes over the past 15 years than it would have if it had used the FIFO method.
• C) The company will have to continue to use the LIFO method indefinitely because of federal income tax rules.
• D) The ending inventory amount reported on the balance sheet may be significantly lower than its current value.

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Definitions:

Section 1231

A tax provision that allows for the preferential tax treatment of gains and losses on the sale or exchange of business property and assets held for more than one year.

Depreciation

An accounting method used to allocate the cost of a tangible or physical asset over its useful life, reflecting wear and tear, deterioration, or obsolescence.

FMV

The Fair Market Value represents the price at which property would be sold in an open market scenario.

Unrecaptured 1250 Gain

A type of gain on the sale of depreciable real property that’s taxed at a different rate than other capital gains.