During a year of falling prices, which cost flow assumption would measure the strongest cash flow position?

Question

Quizplus · Accepted Answer

During a year of falling prices, the FIFO (first in, first out) method assumes that the oldest products are sold first and therefore, the cost of goods sold will include the lowest prices. This results in a higher gross profit and net income compared to LIFO (last in, first out) method, which sells the newest products first and results in a lower gross profit and net income. However, when it comes to cash flow, FIFO would result in a stronger position because it assumes the lower cost of goods sold, which means less cash is going out for inventory purchases. Therefore, FIFO is the best choice for measuring the strongest cash flow position during a year of falling prices.

During a Year of Falling Prices, Which Cost Flow Assumption