# LIFO vs FIFO on NI and CF

Hi! So I know that under LIFO --> Higher COGS --> Lower Taxes (because your taxable income is lower) --> Lower Net Income. But why is it higher cash in the end? I mean shouldn’t net income already get adjusted for taxes? So your NI should be the same as CFO?

CFO = NI + Non cash charges - Change in WC. I just don’t see what items here will make CFO higher than its NI, hence have higher CF than FIFO?

Hope my question is clear here!

If you pay less in taxes, you have more cash left.

Try it with some numbers:

LIFO:

• Revenue = \$100
• COGS = \$70
• Gross Profit = \$30
• SG&A = \$15
• EBIT = \$15
• Interest = \$5
• EBT = \$10
• Taxes @ 30% = \$3
• Net Income = \$7
• CFO = \$100 − \$70 − \$15 − \$5 − \$3 = \$7

FIFO:

• Revenue = \$100
• COGS = \$60
• Gross Profit = \$40
• SG&A = \$15
• EBIT = \$25
• Interest = \$5
• EBT = \$20
• Taxes @ 30% = \$6
• Net Income = \$14
• CFO = \$100 − \$70 − \$15 − \$5 − \$6 = \$4

Note that although FIFO COGS is only \$60, the cash outflow is the same \$70 as under LIFO: they had to replace the same goods at the same cost.

Thanks S2000magician! You are spot-on with what I was looking for!!! I didn’t realize that when calculating FIFO’s CF, we would still be using the COGS under LIFO. Now it’s finally clear!

My pleasure.

on Point