LIFO Working Capital

CFA Level I
#1

How is LIFO working capital lower in rising price case? LIFO means: lower inventory, lower taxes, etc. working capital = CA - CL CA reduces due to lower inventory CL reduces due to lower taxes payable (tax expense recognized in the income statement but not yet paid will go down as tax expense goes down) so, that should keep working capital almost constant

#2

CA decreses more than CL, the WC decreases

#3

I wanted to ask this as well. CA - Lower Inventory + Higher Cash Balance CL - Assumes tax is paid by cash, hence no effect The only confirm data is lower inventory, are we going to assume tax paid by cash or accrued as part of CL?

#4

Compared to FIFO, LIFO has lower inventory = Delta LIFO reserve lower tax =Delta LIFO reserve* tax rate Net = Delta LIFO reserve* (1-tax rate) So even if you assume tax shown on the liability side, NWC still decreases.

#5

Thanks elcfa.