CFA Practice Question

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CFA Practice Question

LIFO liquidation can result in ______.

I. higher tax payments
II. more cash flow
III. a higher profit margin
A. I and III
B. I and II
C. I, II and III
Explanation: LIFO liquidation can result in a higher profit margin, higher taxable income and higher tax payments. The reduction in inventory will generate more cash flow.

User Contributed Comments 6

User Comment
jpducros normally higher taxes lead to lower cash flows. Did I miss something ?
mhtwo Higher taxes but even HIGHER profits, causing higher cash flows.
StJohnDale This is a working capital consideration - a reduction in inventory - converts inventory into cash which results in a higher cashflow
dbedford LIFO liquidation = selling more inventory than they are purchasing
ocionesw LIFO liquidation would have a lower cost of goods sold than the normal case of LIFO, which means that it would generate higher operating income and tax payments, profit margin and cash flow
berylzheng LIFO liquidation means cash saved as there is no replacement of inventory purchased in current year. Therefore cash flow is higher.
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