study session 9 - analysis of inventories

Can someone please explain the validity of the statement: Lower income is associated with a higher cash flow from operations(CFO) under LIFO during increasing prices. What I don’t understand is CFO is derieved from net income. So if net income is low then cfo should be low as well?

its bcoz of tax savings … lower or higher net income has very little to do with cash flows.

That’s what I’m confused about. Shouldn’t there be a direct correlation between net income and cash flow operation?

Nevernind. I got it Thx

LIFO in inflation times = higher COGS. highers COGS = lower net however, LIFO recognizes invesntory on the balance sheet in a manner that understates the ammt really there. if inventory is low, CF is higher. think about a bookstore you theoretically own. the more booksthat are setting there not generating revenue, the more “cash you are tying up…” lower CF, in other words. try to visualize it in your head.

Hey daj thanks for an amazing analogy. What level are u at?

@ dreambig: thanks. i am up for level 2 next june. i am one of the lucky newbies that passed this past june. good luck, i’ll be here helping others.

What method would one use when inflation fluctuates up and down during the period?

It depends. When prices are stable then LIFO, FIFO and Average all produce same results for valuating Inventory and Cost of Goods Sold (COGS). When prices fluctuates (either up or down) for a analysis purpose, its best to use LIFO for COGS and FIFO for Inventory. Cheers