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Give arguments in favor of following statement.

"FIFO method for inventory valuation may increase income tax due as well as showing true financial position of a business with respect to inventory during the period of rising prices."


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During the period of rising prices, price of new inventory will be higher than its last time's price. By using FIFO method, business will be first consuming its previous inventory.

Previous inventory was purchased at lower rate, so, the expense in P & L will be lower. This will result in higher value of net profit. Eventually, for higher net profit higher value of tax would be charged.

On the other hand, reaming inventory will carry higher price and will show higher value of business's current asset.
in simple words. when the profit is high due to FIFO method then the Tex on profit will automatically high.

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