TsIzzWe (Ts) is a company that purchases T shirts from the manufacturer, Frootyl

Question

TsIzzWe (Ts) is a company that purchases T shirts from the manufacturer, Frootyluums (Frooty) and sells them to college students through the college bookstore, Rskoolstore (RSkool). Ts has hired you to be the accountant for the company.

Ts is concerned about paying taxes and has asked you to explain which inventory flow system would be the best one to use to minimize the taxes that are paid on the profits.

Based upon this request, which one would you recommend? Support your position by explaining the differences of the inventory flow systems.

Explanation / Answer

Under LIFO( last in first out) is always suitable for the purpose of minimizing the taxes that are paid on the profits.

If sale price of TslzzWe company's product is increasing or decreasing :

Under FIFO, if sale prices are rising of the product , product will produce more profit , because "cost of goods sold" of the product will be less .

if sale prices are decreasing of the product , product will produce low profit, because in that case "cost of goods sold " will be high

For example, if 10 product is purchase at $20 and 30 products at $40 and 15 products sell at $50. under FIFO , profit of 15 products will be $50 - $20 equals to $30 , whereas

Under LIFO , if prices are rising of the product , product will produce low profit , because "cost of goods sold" of the product will be high,profit of the 15 products will be $50 - $40 equals to $10 , which means the lower the profit , the lower the tax.

if prices are decreasing , product will generate high profit

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