LIFO Reserve

What is the most likely impact on cash flow from operations of using LIFO as compared to FIFO and on the LIFO reserve if inventory quantities are stable and prices are falling? CASH FLOW FROM OPERATIONS LIFO RESERVE A. Higher Increasing B. Higher Falling C. Lower Increasing D. Lower Falling

D

D

yep the answer is D … I understand why cash flow is lower but can someone please explain why the lifo reserve will fall?

When prices are falling, LIFO COGS < FIFO COGS.

cielito Wrote: ------------------------------------------------------- > yep the answer is D … > > I understand why cash flow is lower but can > someone please explain why the lifo reserve will > fall? As prices fall, the gap between current market price of newly purchased inventory and the old historical prices under LIFO is narrowing, so the reserve goes down.

So the LIFE Reserve should in fact be negative?

and by LIFE I obviously meant LIFO. wow.

It goes down, eventually reaching zero when current prices equal old historical prices, but never negative, since under LCM rules you would write-down inventory if it was higher than current market price (there are some nuances to that part, but they aren’t important to the concept)

^ good to know…

Quick question, The only cash flow difference on CFO between LIFO and FIFO is the taxes paid correct?

Super I Wrote: ------------------------------------------------------- > It goes down, eventually reaching zero when > current prices equal old historical prices, but > never negative, since under LCM rules you would > write-down inventory if it was higher than current > market price (there are some nuances to that part, > but they aren’t important to the concept) this is really good to know.

The lower CFO for LIFO in this situation is due to higher tax expense, correct?

annasmom Wrote: ------------------------------------------------------- > The lower CFO for LIFO in this situation is due to > higher tax expense, correct? correct!

I hate to be the black sheep of the group but I am hoping someone can correct me quickly… When Prices are falling, COGS for LIFO is decreasing. Lower COGS on the Income Statement means that CFO is actually increasing, not decreasing…make sense?

Bohmbach, I have trouble with that same concept… You would think that if NI increases due to lower COGS that CFO would also increase, But you have to conentrate simply on the part that if you have Lower COGS you will have HIGHER TAXES thus lower CFO… hopefully that made some sense…