CFA Practice Question

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CFA Practice Question

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

A. Average cost
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
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