LIFO vs FIFO Cash Flow higher, value, result, flows

simeezee

if a firm uses LIFO value its inventory to value its inventory, how does it result in higher cash flows compared to a firm that uses FIFO

Daniel1985

LIFO will cost COGS to increase...but its a Income stmt item....there is no actual change of cash in hand...its only an acounting thing...right?

pacmandefense

right, you have already got it correct to this point.

Further, though COGS is only an accounting thing in your Income Statement, but since it is an expense, more or less of it will determine your taxable income and hence your taxes. And, your taxes are a REAL cashflow.

So, if your COGS is higher under LIFO, your taxable income becomes lower and hence taxes (real cashflow going out) are lower. So your cash in hand is higher.

smartpants

Agreed that under LIFO -->higher COGS -->Lower Taxes--> Lower Income-->High Cash In hand

But how are the "cash flows" (i.e. money going in and out of my account) higher under LIFO?

Micholien

din get u I_Passed_Level_1

thisisbrianly

varundarji,

I'm going to give you the benefit of the doubt and assume that you aren't trolling.

1. If prices are rising then COGS will be higher under LIFO
2. If COGS are higher gross income is lower
3. If gross income is lower and taxes are a percentage of gross income you will pay less taxes under LIFO
4. Taxes are a REAL cash outflow
5. If the taxes (a REAL CASH OUTFLOW) are lower and everything else is the same then our total cash flows will be higher

homie

Bankin' -

Well said. The only technical tweaks I have is :

2. If COGS are higher, gross profit and taxable income are lower
3. If taxable income is lower and taxes are a percentage of taxable income you will pay less taxes under LIFO

Beatnik

Super I Wrote:
-------------------------------------------------------
> Bankin' -
>
> Well said. The only technical tweaks I have is :
>
> 2. If COGS are higher, gross profit and taxable
> income are lower
> 3. If taxable income is lower and taxes are a
> percentage of taxable income you will pay less
> taxes under LIFO


whatccha sayyaaaa