Which inventory method shows a higher tax expense and lower cost of goods sold?

The method that results in a higher tax expense and lower cost of goods sold is FIFO, which stands for First-In, First-Out. Under this inventory accounting method, the oldest inventory costs are charged to cost of goods sold first.

In an inflationary environment, the cost of goods sold will reflect the older, generally lower costs of inventory, leading to a lower cost of goods sold figure. Since profits are calculated by subtracting cost of goods sold from sales revenue, a lower cost of goods sold results in higher reported net income. With higher net income, businesses will face an increased tax liability, leading to a higher tax expense.

This is in contrast to methods such as LIFO (Last-In, First-Out), which would yield a lower net income and lower tax expenses during inflation, as it records the newest, often higher inventory costs first, thus elevating the cost of goods sold. Other options, such as JIT (Just-In-Time) and Weighted Average, do not necessarily directly relate to consistent outcomes regarding tax expense and will vary based on inventory turnover and specific purchase patterns.