During times of inflation, which of these inventory accounting methods is best for cash flow?
A) FIFO, because the cheapest goods are recorded as being sold first, resulting in lower cost of goods sold and higher reported net income.
B) LIFO, because the most expensive goods are recorded as being sold first, resulting in a higher cost of goods sold and a lower reported net income.
C) Specific identification, because it correctly identifies the actual item sold and so the actual cost is recorded on the income statement.
D) Weighted average, because it smoothes the reported cost of goods sold over time.
E) It doesn't matter which you use since cash flow is unaffected by the choice of inventory identification method.

Question

Quizplus · Accepted Answer

Using LIFO during inflation results in higher cost of goods sold, which reduces taxable income and taxes, thus improving cash flow.

During Times of Inflation, Which of These Inventory Accounting Methods