You are a financial adviser with a client in the wholesale produce business that
ID: 2367944 • Letter: Y
Question
You are a financial adviser with a client in the wholesale produce business that just completed its first year of operations. Due to weather conditions, the cost of acquiring produce to resell has escalated during the later part of this period. Your client, Raphaela Gonzalez, mention that because her business sells perishable goods, she has striven to maintain a FIFO flow of goods. Although sales are good, the increasing cost of inventory has put the business in a tight cash position. Raphaela has expressed concern regarding the ability of the business to meet income tax obligations? Question: What method of inventory you would advise Raphaela to use? Explain how your recommendation would help with reducing her income taxes.Explanation / Answer
-Cost of goods sold (COGS) refers to the inventory costs of those goods a business has sold during a particular period.
-FIFO and LIFO Methods are accounting techniques used in managing inventory and financial matters involving the amount of money a company has tied up within inventory of produced goods, raw materials, parts, components, or feed stocks.
-FIFO stands for first-in, first-out, meaning that the oldest inventory items are recorded as sold first but do not necessarily mean that the exact oldest physical object has been tracked and sold; this is just an inventory technique.
-LIFO stands for last-in, first-out, meaning that the most recently produced items are recorded as sold first. Since the 1970s, U.S. companies have tended to use LIFO, which reduces their income taxes in times of inflation. LIFO is only used in Japan and the U.S.
-For details, please read the article at:
http://en.wikipedia.org/wiki/FIFO_and_LI
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