Business – 10.1 Financial statements – Inventory valuation | e-Consult
10.1 Financial statements – Inventory valuation (1 questions)
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The impact of each method can be illustrated as follows:
| Costing Method | Effect on Cost of Goods Sold (COGS) | Effect on Profit | Effect on Tax |
| FIFO | Lower COGS when prices are rising | Higher profit | Higher tax liability |
| LIFO | Higher COGS when prices are rising | Lower profit | Lower tax liability |
| Weighted‑average | COGS reflects an average of all purchases | Profit lies between FIFO and LIFO | Tax liability is moderate |
Because profit and tax are directly linked to the chosen cost flow assumption, managers must balance the desire for a favourable profit presentation against tax efficiency, leading to strategic valuation decisions.