Hi,
Can someone walk me through real fast how income taxes affect the indirect cash flow statement? My question is spurred from the LIFO/FIFO inventory valuation and how it affects cash flow. Using LIFO, your COGS are higher and thusly you pay less taxes which translates to a greater cash flow. This is easy to understand. However, I am having a hard time reconciling this with my actual statement of cash flows.
Where does the lower income taxes paid show up on the cash flow statement to makeup for the lower net income?
Thanks.
Cash flow number should be the same whether you use the direct or indirect method to calculate cash flow. But to answer your questions specifically, taxes paid show up as a cash flow from operations outflow. So, assuming rising prices, LIFO does indeed reduce taxes paid which results in higher cash flow from operations holding everything else constant. As an aside, are you going from FIFO to LIFO? That’s backwards of what’s discussed in cirriculum. The CBOK talks about going from LIFO to FIFO.
Ok, nevermind on this whole thing. I actually just figured it out myself - turns out it was a total brain fart on my part. The difference is made up in the inventory line item reconciliation. Thank you for the help though 