During times of inflation, which of these inventory accounting methods is best f

Question

During times of inflation, which of these inventory accounting methods is best for cash flow?

A. 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.

B. Specific identification, because it correctly identifies the actual item sold and so the actual cost is recorded on the income statement.

C. Weighted average, because it smoothes the reported cost of goods sold over time.

D. It doesn't matter which you use since cash flow is unaffected by the choice of inventory identification method.

E. FIFO, because the cheapest goods are recorded as being sold first, resulting in lower cost of goods sold and higher reported net income.

Explanation / Answer

Option A

LIFO records expensive goods sold first, resulting in higher COGS and lower operating profits. So loewr tax has to be paid in the initial years and more tax has to be paid in the later years. Total tax paid over the years would be same but in this scenario paying less taxes in the begining of the seasons increases value of money using the concept of time value of money.

But according to the explanation given in the options, option A is not correct. Option D is the right option for one of the reasons stated above.

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