Financial Accounting (MGT101)

Give arguments in favor of following statement.

"FIFO method for inventory valuation may increase income tax due as well as showing true financial position of a business with respect to inventory during the period of rising prices."

Solution:-

As in Period of Price rising, current market price of the inventory will be higher than the previous market price on which inventory was purchased by the business. If using FIFO method the lower value of inventry will be rocorded then the value of inventory consumed will not meet the current market position. As a result all the Expenses shown in the financial statements will be lower, profit will be higher which may cause increase in income tax due and the ending inventry will show a higher value.