A profitable LIFO company has experienced increasing inventory prices and maintained stable quantities over time. Which of the following is least likely to increase had the company used FIFO? a) Net Income b) Working Capital c) Operating Cash Flow d) Stockholder’s equity
NI would increase. In FIFO, COGS would be lower because earlier bought inventory would go into COGS. So NI would be higher. So A is eliminated bcos NI goes up, Stock holders equity would go up as well. D is eliminated CFO would increase because NI went up and that is the starting point for CFO in the Indirect method. C is eliminated Working Capital in both cases would be difference between CA and CL – which should be the same. Inventory spending would be the same (Purchase of Inventory). So is B the answer
wouldn’t working capital be higher because ending inventory is valued at the higher more recent cost?
Working capital is the amount of investment in Inventory. That should not change between LIFO and FIFO because that is a current period expense, isn’t it?
isn’t working capital just current assets - current liabilities? and decision to go LIFO or FIFO affects COGS, not balance sheet…but im just guessing here, i have yet to really crack Vol.3.
that is exactly what I am also saying above, though not as explicitly —
Found this on Investopedia In a period of rising prices, LIFO will assign higher prices to the consumed inventory (cost of goods sold) and is therefore more conservative. Just as COGS on the income statement tends to be higher under LIFO than under FIFO, the inventory account on the balance sheet tends to be understated. For this reason, companies using LIFO must disclose (usually in a footnote) a LIFO reserve, which when added to the inventory balance as reported, gives the FIFO-equivalent inventory balance. So inventory is lower under LIFO (and higher under FIFO), but it is offset by the LIFO Reserve so no net change? Does that sounds right?
Reading 35, problem 2 in the CFA book- NI wll go up because COGS is lower under FIFO Working Capital will go up because inventory balances are higher under FIFO Operating Cash Flow is least likely to go up because higher NI is offset by higher taxes Stockholder’s equity will go up due to higher NI and higher assets
So the answer is C!
If Operating Cash Flow is least likely to go up because higher NI is offset by higher taxes, wouldn’t higher inventory balances increase the depreciation to be added back and thus increase OCF?