Answer the following statements true (T) or false (F)

Question

1. The uniform capitalization rules (UNICAP) require the capitalization of some overhead costs that are expensed for financial accounting purposes.
2. Many taxpayers use the LIFO method of inventory valuation because during inflationary periods, LIFO normally results in the lowest inventory value and hence the lowest taxable income.
3. A taxpayer may use the FIFO or average cost methods for financial statement purposes, while using the LIFO method for tax purposes.
4. For tax purposes, the lower of cost or market method must ordinarily be applied to each separate inventory item.
5. In determining taxable income, "market" for purposes of applying the lower of cost or market method means the price at which the taxpayer can sell the inventory item.

Answer 1

1. TRUE
UNICAP is a more comprehensive capitalization requirement.
2. TRUE
Cost of goods sold will be higher under LIFO during inflationary periods, lowering taxable income.
3. FALSE
Once LIFO has been elected for tax purposes, the taxpayer's financial reports must also be prepared using LIFO.
4. TRUE
Lower of cost or market must be applied separately to each inventory item.
5. FALSE
Market means the price at which the taxpayer can replace the inventory item.