Hi guys, why is cash-flow higher under LIFO than FIFO? I’m sure there is an obvious explanation but it is escaping me. Thanks!
it is not a rule thats if you have rising inv costs under lifo that will cause you to have more expenses pay less taxes thus higher cash flows
If prices are rising over the period AND inventory quantitites are stable or increasing, LIFO COGS will be greater than FIFO COGS. Therefore, LIFO pretax income would be lower, resulting in lower tax related cash outflows.
Thanks Ahmad! So cash flows aren’t actually based on the actual prices paid by customers?? I’m confused. cheers
Cancel that – I was thinking this affected revenues (or, cash received from suppliers) but it doesn’t, it’s all becoming clearer now. Thanks!
Prices paid by consumers effect SALES. Obviously sales effect cash flows but there is no connection between the inventory cost flow assumptions and sales. The LIFO versus FIFO decision determines which costs are allocated to COGS and expenses, and which ones are allocated to inventory and presented as an asset on the balance sheet.
Got it, thanks Amalj. It’s been a long day, was having a brain freeze