Raphaela Gonzalez

Inventory methods are very crucial to a business operations, it determines how cost are distributed to cost of goods sold and ending inventory. We spoke recently of your concerns regarding the ability of your business to meet its tax obligations and I have determined through research and findings that using the wrong inventory method could be very costly to a business with limited amount of cash flow. By using the first in-first out or FIFO method in your current situation would be a disadvantage. My suggestion would be to switch to a different method that could help in reducing taxes and increase cash flow. In this case it would be the last in-first out also known as LIFO method.

The FIFO method involves assigning the lowest amount to cost of goods sold which terms will make a higher gross profit and net income. By using FIFO it would give you a higher taxable income which would be counterproductive to the problem you're trying to achieve. On the other hand the LIFO method assigns the highest amount to cost of goods sold. By switching to the LIFO method it will help the business in many ways such as reducing taxable income and increasing cash flow. As prices continue to rise using the FIFO method could be very costly to a business who is struggling to pay taxes. By using the LIFO method that I have suggested it would solve many key problems that you have told me about. There are many advantages of using LIFO during a period of price inflations. It assigns the highest cost of goods sold, by doing this it will help lower gross profit, net income, and will lower book value which in turn reduces taxable income. By reducing the amount to be paid for taxes it will increase cash flow.

By using my recommendation it would greatly reduce your concerns about your business meeting its obligations. As the LIFO method assumes that products sold were purchased at the most recent prices it would reduce your taxable income. It would also increase your cash flow. I would be glad to discuss this recommendation with you more at a date convenient to you if you would like.