The correct answer is: D. material prices are fluctuating.
LIFO stands for Last In, First Out. It is a method of inventory accounting in which the cost of the last goods purchased is used to value the cost of goods sold. This method is more suitable when material prices are fluctuating because it results in a lower taxable income when prices are rising and a higher taxable income when prices are falling.
A. Material prices are rising. When material prices are rising, LIFO will result in a lower taxable income because the cost of goods sold will be based on the cost of the last goods purchased, which will be higher than the cost of the goods that were purchased earlier.
B. Material prices are falling. When material prices are falling, LIFO will result in a higher taxable income because the cost of goods sold will be based on the cost of the last goods purchased, which will be lower than the cost of the goods that were purchased earlier.
C. Material prices are constant. When material prices are constant, LIFO will result in the same taxable income as FIFO (First In, First Out), which is a method of inventory accounting in which the cost of the first goods purchased is used to value the cost of goods sold.
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