Question

The following note was contained in a recent Ford Motor Company annual report: points NOTE 8. INVENTORIES-AUTOMOTIVE SECTOR Inventories at December 31 were as follows (dollars in millions) Previous Current Year Year Raw material, work in process, & supplies $ 2,847 $ 2,812 Finished products 3,982 3,970 Total inventories at PIPO 6,829 6, 782 LOSS LIFO Adjustment (928) (865) Total $ 5,901 $ 5,917 Book Print References About one-third of inventories were determined under the last-in, first-out method.

Answer 1

Under LIFO (Last-in -last out) method ,units acquired last are sold first .so when cost are rising ,cost of goods sold will be higher since inventory acquired at higher cost are sold first .

Higher cost of goods sold will generate lower profit and thus lower taxes.

To lower cash outflows for taxes ,LIFO method should be used in case costs are rising .