honeycfa

Assume that Hunter Round Restaurant Supply currently uses the last in, first out (LIFO) method to account for inventory and that the business environment is one of rising prices and stable or growing inventory balances. In addition, Hunter Round has an effective tax rate of zero percent due to tax loss carrybacks. All else equal, which of the following statements is least likely valid? By using LIFO instead of first in, first out (FIFO), Hunter Round has:

A) lower net income.

B) higher cash flows.

C) lower working capital.

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In the absence of taxes, there is no difference in cash flow between LIFO and FIFO. The other statements are true. For the examination, memorize the financial impact of rising and falling prices for the two inventory methods.

honeycfa

In periods of rising prices and stable or increasing inventory quantities, a company using LIFO rather than FIFO will report cost of goods sold and cash flows which are, respectively:

COGS

Cash Flows

A) Higher Higher

B) Lower Lower

C) Higher Lower

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In this situation, LIFO results in higher cost of goods sold because it uses the more recent and higher costs than FIFO. LIFO results in higher cash flows because with lower reported income, income tax will be lower.

honeycfa

During periods of rising prices, which of the following is most likely to occur?

A) LIFO COGS > FIFO COGS, therefore LIFO net income > FIFO net income.

B) LIFO COGS < FIFO COGS, therefore LIFO net income < FIFO net income.

C) LIFO COGS > FIFO COGS, therefore LIFO net income < FIFO net income.

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Under the assumptions of this question and using LIFO, the most expensive units go to COGS, resulting in lower net income.