In the following equation: FIFO inventory = LIFO inventory + LIFO reserve, the LIFO reserve is used to convert the LIFO inventory to a comparable FIFO inventory because the LIFO inventory is: A) understated representing unrecognized losses and deferred taxes. B) understated representing unrecognized profits and deferred taxes. C) overstated representing unrecognized profits and deferred taxes. D) understated representing unrecognized profits and deferred liabilities.
Given an inflationary environment, Lifo is understated since the last in is the first out. B
Yes correct ans is B B) understated representing unrecognized profits and deferred taxes. LIFO reserve represents profits not recognized and taxes not paid (because COGS is higher and net profit is lower under LIFO). But why would it not be D?
Net income is lower under lifo than fifo. So profits are lower.
it would not create a deferred liability. I think you are getting confused between a Deferred Liability and a Deferred Tax Liability. Though a Deferred Tax Liability is a Deferred Liability, in this case when both answers are provided - … Deferred Taxes is the better choice, because it might be a Deferred Tax Asset as well. (I think). CP