CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

Assuming that prices are rising and inventory balances are increasing, which method will generate the highest cash flow?

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
You need to log in first to add your comment.