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?

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

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