when prices are rising and inventory is stable or increasing, using LIFO rather than FIFO results in higher total cash flows because we pay lower taxes when using the LIFO methodology… now when the firm capitalizes interest instead of expensing them…its stated that CFO increases and CFI decreases and net cash flow is the same, this part is pretty clear …however i dont understand why the tax effect doesnt come into play…for example the firm that expenses the interest exp…will have lower EBT…pays lower taxes
company pays tax on EBT, not on cash flows. still need to deduct int exp even it is capitalised.
but wont the tax paid be different…when its capitalized it pays higher taxes and when it is expenses…it pays lower taxes
you mean the deduction on the earnings is different? int. exp. is capitalised, then it will be some deduction in the p&l according to its deprn rate. not necessarily resulting in higher taxes.
Take into account that for tax purposes it doesn’t matter if company capitalizes or expenses interest. It is tax deductible while paid…