Barley Corporation used the FIFO method for inventory valuation when it began operations because this reflected the true physical flow of inventory. Its inventory under FIFO is valued at $375,000 at the end of its first year of operations. If Barley instead used LIFO, its ending inventory would be valued at $75,000. Barley Corporation’s tax rate is 21 percent. For the next several years, Barley expects to see a steady increase in the cost of its products. Barley expects that its inventory will remain at about the same quantity for the next several years.
a. Is Barley Corporation required to use the inventory method that matches its actual physical flow?
b. If Barley Corporation used LIFO instead of FIFO, how much income tax could it have saved in the current year?
c. If Barley changes from FIFO to LIFO for tax purposes, does this have any impact on what it reports on its financial statements?