#5

Suppose you are the controller of a company that sells inventory. Also, suppose the economy currently enters a period of high inflation. Although profits are higher this year than last year, you realize that the cost to replace inventory is also higher. You are aware that many companies are changing to the Last-In First-Out (LIFO) inventory method to save on taxes in the current year; however, you are concerned that when prices eventually decline, the LIFO method will result in higher taxes. Because declining prices are usually equated with economic recession, it is likely that the higher taxes will be paid when revenues are declining. What factors should you consider before making a change to LIFO? Based on the above considerations, what would you recommend?