- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 6. Analysis of Inventories
- Subject 2. The Effects of Inflation and Deflation on Inventories, COGS and Gross Margin
CFA Practice Question
Assuming that prices are rising and inventory balances are increasing, which method will generate the highest cash flow?
B. LIFO
C. FIFO
A. Average cost
B. LIFO
C. FIFO
Correct Answer: B
As long as price level increases and inventory quantities do not decrease, a deferral of income tax occurs, generating higher cash flows (tax must be paid in cash).
User Contributed Comments 4
| User | Comment |
|---|---|
| teddajr | LIFO -> Higher COGS -> Lower Income -> Lower Tax -> Higher CF |
| 01827 | However; FIFO --> lower COGS --> Higher net income --> Higher CF |
| johntan1979 | Higher NI -> Higher tax -> Lower CF |
| denisw123 | This depends on many factors. If LIFO inventory is x5 FIFO inventory say, LIFO NI < FIFO NI, NI CFO FIFO > NI CFO LIFO |