When using LIFO when inventory prices are falling, why would thos result in lower cash flows?
I presume that you mean that inventory _ costs _ (not prices) are falling.
If so, then, compared to FIFO or average cost, the COGS under LIFO will be lower, so taxable income will be higher, so we’d have to pay more in income taxes: a cash outflow.
Cash flow before taxes is the same for FIFO. LIFO, average cost, and specific identification.
Why would "_ Cash flow before taxes is the same for FIFO. LIFO, average cost, and specific identification" _
If inventory cost is falling LIFO cashflow supposedly should be higher as lower COGS will result in higher net income and higher cash. I understand that the taxes are higher but the decrease in COGS is higher than the increase in taxes, and accordingly, I presume that this should result in higher cashflow.
Am I missing something!
You buy some stuff for $100 and you sell some stuff for $150. Your cash flow is $50.
Then you decide how to allocate costs between COGS and Inventory. How you decide to do that doesn’t change the $50.
Oh, this is simpler than I thought, I was not taking the effect of the inventory on the cashflow. Thanks so much.
You’re welcome.