dotamasta

5)
During inflation, FIFO will generate higher earnings because cost of goods will be lower than if LIFO was used. However, LIFO will generate higher cash flows since cash outflows for taxes will be lower for LIFO.

LIFO Will generate higher cash flows because you pay less taxes.

Imagine with FIFO when prices are rising with FIFO you pay less price yo buy inventory and profit more when you sell, so you pay more tax because of more gain.

With LIFO you pay high price to buy inventory and profit less when you sell and you pay less taxes and retain more as earnings and more cash flow.

when prices are descreasing opposite will apply.

dotamasta

revenant Wrote:
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> I think I am missing out some concept about
> conversion to FIFO COGS here.
>
> Shouldn't we compare current year LIFO's COGS
> ($14,500) to FIFO's COGS ($15,000) and work out
> the difference it made to current year's RE?

Yes, usually you use only current year's figures. But not in this case. This is because, you cannot have your RE based on FIFO this year and based on LIFO for last year.

Also remember, Retained Earnings is a cumulative figure and not a yearly figure.

Hope this clarifies.