Explanation

LIFO (Last In, First Out) is beneficial for tax purposes in inflationary times. During inflation, prices rise over time, so the most recently purchased inventory costs more than earlier purchases.

LIFO assumes that the last items purchased are the first ones sold. This means the cost of goods sold includes the higher recent prices, resulting in higher COGS and lower reported profit. Lower profit means lower income tax.

FIFO (First In, First Out) would have the opposite effect – it uses older, lower costs for COGS, resulting in higher profits and higher taxes during inflation. WAP (Weighted Average Price) and SAP (Simple Average Price) fall between these extremes.

Note: While LIFO provides tax benefits during inflation, it may not be permitted under all accounting standards. International Financial Reporting Standards (IFRS) do not allow LIFO, though it is permitted under US GAAP.