in a price increasing and inventory quantity stable environment, use LIFO will have a higer cash flow than FIFO due the tax. so, the before tax cash flow, in LIFO will be lower than FIFO, after tax cash flow will be the opposite. dose it change the tax rate, or in which way tax could be so dramatically impact the cash flow both under LIFO and FIFO? Thanks. by the way, they both has the same quick ratio, but LIFO and FIFO will have different cash flow, how quick ratio to be the same ? Thanks.
because quick ratio excludes inventory, making inventory accounting methods moot. Quick Ratio = (Cash & Cash Equivalents + Accounts Receivable) / Current Liabilities Current Ratio = (Cash & Cash Equivalents + Accounts Receivable + Inventory) / Current Liabilities FYI, I’ve seen LI questions that ask you whether the sale of $x of inventory for cash increases/decreases/no effect on these ratios, so ensure you know the differences. The correct response would be no impact on current ratio, increase in quick ratio. edit: formatting
The tax rate does not need to change for LIFO to produce higher cash flow than FIFO. All that is happening is that LIFO causes COGS to be larger and pre-tax income to be smaller, thus taxes (and net income after tax) are lower. The reason the quick ratio will not change is because the LIFO/FIFO change will not necessarily change next year’s cash balance. Though net income will be different based on the method, so will inventory levels, and the effects will be offsetting with respect to calculating the change in next year’s cash position. Recall how changes in balance sheet amounts affect cash flow as do items on the income statement.