Basic LIFO FIFO concept question understand, question, decrease, increase

Kiakaha

Hi,
I know this should be easy but I can’t figure out by myself.
Considering rising rates and rising inventory, the LIFO COGS is higher than FIFO. In that case, how does LIFO end up having higher cash flow? I understand that because COGS is higher, the income taxes are lower, but I can’t seem to figure out how the decrease in income tax (for LIFO) would offset the increase in COGS??
Thanks

studyn

Good example.
But for the example you give, doesn’t COGS also find a way into C/F statement (in the way of “cash paid to suppliers” which increases if COGS is higher, assuming no change in inventory and a/c payables) In that case, wouldn’t COGS from LIFO being higher, would lead to a reduced c/f than that of FIFO?
maybe I am missing something more?

agulani

you are missing “ceteris paribus”
if you’re paying more because of inflation for something, your cashflow is reduced.
but that is not the question.

farrukhsadiq

Can you please elaborate??

draz

cash flow is more related to tax deducted. since LIFO has higher COGS, the income is lower, than tax deduction is lower. hence, the high cash flow.
am I　right?

islandgyrl

“cash flow is more related to tax deducted.” .. howz that?
Wouldn’t COGS value have greater impact in bringing down the cash flow?
for the example given above by ov25, wouldn’t cash flows be somewhat like this:
for LIFO:

cash collections: 1000
cash to suppliers: (assuming no change in inventory and a/c payables): (400)
cash interest: (100)
cash taxes: (150)
net Cash Flow: 350
for FIFO:
–
cash collections: 1000
cash to suppliers: (assuming no change in inventory and a/c payables): (300)
cash interest: (100)
cash taxes: (180)
net Cash Flow: 420
So although the tax expense is higher in FIFO, the net cash flow seems to be higher.
I know I seem to be making some mistake … but can’t figure out…
help pls..
thanks.

ramzes

Cash paid to suppliers won’t change based on the inventory valuation method.
Purchases = CoGS + End Inv  Beg Inv.
In case of FIFO, COGS will be less and Inv will be more. In Case of LIFO, COGS will be higher and INV. will be less by the same amount.
So the cash paid to Suppliers will always be the same.
The only CF difference would be from the Tax.