How do LIFO and FIFO affect financial statements?

Can you explain how LIFO and FIFO methods affect financial statements?

Sure! LIFO (Last In, First Out) and FIFO (First In, First Out) are inventory valuation methods that impact the cost of goods sold and inventory valuation on financial statements.

What are the main differences in their impact on taxes?

LIFO typically results in lower taxable income during inflationary periods because it matches the most recent, higher costs against revenues. FIFO, on the other hand, can lead to higher taxes as it reflects older, lower costs.

How do these methods affect cash flow?

LIFO can improve cash flow in the short term by reducing tax liabilities, while FIFO may show higher profits but can lead to higher tax payments.

Which method is generally preferred by companies?

It depends on the company's financial strategy. LIFO is often preferred in times of rising prices for tax benefits, while FIFO is favored for showing higher profits.