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
Assume prices are increasing, a LIFO will cost your COGS to increase, therefore decreasing your income. A lower income, compared to a higher income if using FIFO, results in lower tax paid, hence higher cash flow.
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?
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.
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?
varundarji Wrote: ------------------------------------------------------- > 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? youre not paying as much taxes mindflood
din get u I_Passed_Level_1
varundarji Wrote: ------------------------------------------------------- > din get u I_Passed_Level_1 balls
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
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
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
You are correct Super. I meant gross profit when I said gross income, too late to edit unfortunately.
All is correct here. I just want to add one thing that may help. I’ve heard people treat COGS as some sort of cash flow. Mind you, it is an Income Statement expense and also may show up in the Balance Sheet; it is not part of the Cash Flow Statements. I guess some people think simplistically about COGS as they do in everyday life; you pay cash for something that you later sell. Turns out it is simply not part of the CF statements and this ‘expense’ may or may not have been paid with cash.