CFA CFA Level 2 Total Cash flow under LIFO and FIFO

Total Cash flow under LIFO and FIFO

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  • wannabe1988
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    Dear esteemed forumers. I would like to ask why is it under LIFO, total cash flow is higher and under FIFO, total cash flow is lower? Thank you in advance! 

    rsparks
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    First. Lifo and Fifo value inventory so keep that in mind. Inventory is an asset on the balance sheet. A company’s choice of inventory accounting will affect the company’s income, cash flow and balance sheet.

    If a company is using Fifo in a rising price and increasing inventory environment, our COGS will be lower, Net Income  higher however we will pay more tax on the high net income, lowering our cash flows. Tax expenses are a real cash expense and lower a company’s cash flow. Thus LIFO will have a higher cash flow amount.

    Holding sales constant: lower COGS will impact gross margin. Net income will be higher for Fifo compared to Lifo

    working capital: Current Asset minus current liabilities. Higher inventory will translate to higher working capital increases.

    wannabe1988
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    Got it! Thanks again for answering my question!! 🙂 🙂 the answer is super clear! 

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