Markham Inc. is a profitable non-U.S. firm that uses the LIFO inventory cost-flow assumption for tax purposes and the FIFO cost-flow assumption for financial statement purposes. When prices are declining, which of the following statements is most accurate regarding the deferred tax implications relating solely to the choice of inventory cost-flow assumptions? A) If a profitable firm uses LIFO for tax purposes and FIFO for financial statement reporting, a deferred tax liability will result. B) Neither IFRS nor U.S. GAAP allows firms to use different inventory cost-flow assumptions for tax purposes and financial statement purposes. C) If a profitable firm uses LIFO for tax purposes and FIFO for financial statement reporting, a deferred tax asset will result.
A
B If you use Lifo for tax purposes you have to use it on the financial statements as well. IFRS does not allow Lifo.
I was gonna say A too but now B sounds quite right. i remember sth about having to use LIFO for both FS and tax…
B - LIFO conformity rule for US GAAP. Otherwise I would have said C. When prices are declining, wouldn’t the LIFO for tax purposes mean more taxes payable vs FIFO and thus a deferred tax asset?
There would be no DTA or DTL because there is no timing differences between your income statement and tax code regarding cost of goods sold…atleast at level 1
Must be B, assuming they were allowed, I can’t see it being a temporary difference, hence no dta or dtl…
i think answer should be C…DTA will be created…since question says prices are decling, so if the company is using lifo for tax purposes, it should report lower value for cogs, a higher net income and hence a higher tax payable compared to income tax expense in the income statement…hence DTA will be created…please correct me if i am wrong???
You are assuming that the tax code uses a different methodology to price Cost of goods sold. Its the same methodology so there are no timing differences. So no DTA or DTL and under US GAAP as someone mentioned they practice the lifo confomity rule where if you use Lifo for tax purposes you must use it for FS purposes as well. IFRS does not allow LIFO inventory cost flow method. Hope this helps.
but the question says that it uses lifo for tax and fifo for financial reporting…wat say ??
I agree with sgkhade’s greater profitability and taxes under lifo means creation of a tax asset. But, assuming IFRS and US GAAP are our only options for financial reporting…
Grrr… but the question says specifically that the firm uses LIFO for tax and FIFO for F/R… nothing about it being US GAAP or IFRS Also, isn’t B incorrect because a US firm can use FIFO for tax and LIFO for Financial reporting?
Correct Answer is C: Reasoning— Some jurisdictions allow companies to use different inventory cost-flow methods for financial statement purposes and for tax purposes. Where this is permissible (which is determined by each country’s tax laws, not by the accounting standard-setting bodies), temporary differences will arise. LIFO (tax): when prices are declining, the most recent (lower) prices are included in COGS. This results in a higher inventory value, and hence a higher tax base, compared to FIFO. FIFO (financial statements): when prices are declining, the oldest (higher) prices are included in COGS. This results in a lower inventory value, and hence a lower carrying value for financial statement purposes, compared to LIFO. Therefore, there is a deductible temporary difference since the higher tax base results in an excess of taxes payable over income tax expense. This gives rise to a deferred tax asset.
i neeed to hit the books again…good question though
Thanks Damil, good question. I think I would have chosen C in a test environment.