Which method results in lower taxes when prices are rising?

The LIFO (Last In, First Out) method results in lower taxes when prices are rising because it allows a company to match its most recent and higher costs against current revenues. In an inflationary environment, the costs of inventory typically increase over time. By using LIFO, the company records the more expensive inventory as sold first, resulting in higher cost of goods sold (COGS) on the income statement. This higher COGS reduces taxable income, thereby minimizing tax liabilities for the company.

In contrast, methods like FIFO (First In, First Out) would record older, less expensive inventory as sold first, leading to lower COGS, higher taxable income, and consequently higher taxes. The average cost method smooths out the effects of rising prices but doesn't provide the same tax benefits as LIFO in a rising cost environment. Meanwhile, the specific identification method tracks each specific item sold, which can complicate tax calculations and does not inherently take advantage of inflation in the same way LIFO does.