Reflection Paper on Statement of Cash Flow

Inventory Valuation done by LIFO and FIFO can be completely different when talking about accounting and how they work as a a technique of physical inventory flow when spoilage is possible. In the article, The Question of LIFO or FIFO: Which Is Preferable?, it gave an example of a grocery store keeping stock rotated in order to avoid perishable, tangible food or other items from going bad on the shelf. This can be used for any type of product that has a limited amount of storage life, and would most likely work best utilizing the FIFO or First In, First Out method to insure the product delivered to customers is fresh and within the coded date and avoiding spoilage cost sitting in your warehouse or on your shelf.

The next piece of the LIFO & FIFO puzzle is how it pertains to accounting, and how to recognize the fluctuating cost of inventory that is subject to certain volatility of price. The same article explained it pretty well, and understanding that price changes of inventory can be subject to several factors outside of the normal rate of inflation will help us understand why these techniques are so important to our accounting practices. A large portion of our gasoline used for consumption in the U.S. comes from the Middle East in the form of oil, and different economic factors have a major impact on its cost to us. If we purchase a barrel of oil for $100 in January, a barrel for $140 in February and another in March for $150, we have "layers" of cost within our inventory stockpile.

Using LIFO as our valuation method in a market where prices are actively rising it will show a higher cost of goods sold number and consequently, reduce income. The benefit here is in the cash flow. With a higher cost of goods and lower income, the taxable income will be lower, showing an increase of cash flow. Using FIFO as a valuation method, it will allow revenues to appear higher but be counteracted by a larger taxable income number.

As the article explains,...