How is CFO different in FIFO and LIFO ?
Before taxes, it’s not different.
After taxes, it might be. When prices are rising, LIFO gives lower taxable income, so lower taxes, so higher CFO.
Read is somewhere :
- Decrease Inventory by $3, let’s say; 2. Increase COGS by $3 3. Net Income will decrease by (-$3 * 35%) = -$1.95 4. Cash Flow from Ops. decreases by $1.95 (Net Income was reduced) 5. However, cash flow from ops. increases by $3 due to adjustment in inventory (a reduction), a working capital item 6. Net result in the cash flow from Ops is: -$1.95 + $3.0 = $1.05 (increase)
So, cash flow from ops. has increased $3.0, due to lesser working capital requirement (since inventory was reduced - LIFO) - positive impact on CF.
On the other hand, net income was reduced due to higher COGS (net of tax at 35%) - negative impact on cash flow of $1.95.
Net effect on cah from ops. = $1.05
Explain me this 5th statement please if you think this post is correct…
- However, cash flow from ops. increases by $3 due to adjustment in inventory (a reduction), a working capital item
On number 3, if we’re assuming the tax rate is 35% then the NI adjustment would be -3(.65). We adjust NI to OCF by taking into account changes in WC, the increased cogs results in a larger decrease in inventory, a working capital account. A decrease in an asset WC account is a source of cash. The net affect to OCF is (-.65*3) plus 3 or this is also equivalent to tax rate * increased cogs
Dont go by the above logic i was on a similar track earlier…this type of thinking creates a lot of confusion and a lot of time leads to incorrect answers on CFA Problems, so try to understand what the curriculum is trying to focus on here…
Would strongly suggest you to go back to CFAI BB (Page-16)- (Solution 4)- the only reason CFO goes up (under LIFO) is the lower taxes (cash taxes) paid and no other reason (they have it explicity clear)…
Thnxx … will keep it in my head
yeah clear now … thnxx