During a period of rising prices and increasing inventory, which cost flow assumption used on both federal income tax returns and financial reports would provide a company with the greatest cash position?

Question

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During a period of rising prices and increasing inventory, using LIFO would result in a higher Cost of Goods Sold (COGS), which in turn would result in a lower taxable income and therefore lower income tax expense. This would leave the company with more cash. Additionally, since LIFO assumes that the most recent inventory purchases go out first, it would result in a lower ending inventory value on the balance sheet, which could lower the company's tax liability and increase its cash position.

During a Period of Rising Prices and Increasing Inventory, Which