Barley Corporation decides to use the FIFO method for inventory valuation when it begins operations because this reflects 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. Due to its first-year profitability, Barley is in the 34 percent marginal tax bracket. For the next several years, Barley expects to see a steady increase in the cost of its products. Barley expects that its inventory will probably 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 had used LIFO instead of FIFO, how much income tax could it have saved for 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?