Question

At the end of January of the current year, the records of Donner Company showed the following for a particular item that sold at $15.00 per unit:
Transactions Units Amount
Inventory, January 1 500 $2,500
Purchase, January 12 620 4,340
Purchase, January 26 100 900
Sale (380)
Sale (210)

Between FIFO or LIFO, which method would produce the more favorable cash flow?

Answer 1

Answer:

FIFO method decreases COGS and increases net income, but both methods will result in a similar cash flow ($8,850).

Explanation:

cost of goods sold using FIFO:

380 x $5 = $1,900

(120 x $5) + (90 x $7) = $1,230

total = $3,130

profit = (590 x $15) - $3,130 = $5,720

cost of goods sold using LIFO:

(100 x $9) + (280 x $7) = $2,860

210 x $7 = $1,470

total = $4,330

profit = (590 x $15) - $4,330 = $4,520

assuming that the company does not incur any operating costs:

Cash flow from operating activities (using FIFO):

Net income                                 $5,270

adjustments to net income:

Decrease in inventory               $3,130

Net cash flow                             $8,850

Cash flow from operating activities (using LIFO):

Net income                                 $4,520

adjustments to net income:

Decrease in inventory               $4,330

Net cash flow                             $8,850