CFA Practice Question

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CFA Practice Question

When prices are rising, FIFO results in ______ than LIFO.
A. lower working capital and higher cash flows
B. higher working capital and higher cash flows
C. higher working capital and lower cash flows

User Contributed Comments 12

User Comment
Pooh FIFO->lower cash flow
giansante I get this wrong every time and am thinking I should just memorize it but can someone help me rationalize this.
FIFO -> higher ending inventory
lower COGS
higher NI
... higher cash flow from operation???
neob no,higher NI=higher taxes,so lower cfo
Cata maybe it's easy if you make a graph, time on x, prices on y, an un-sloping line for inventory (rising prices)....Lifo results in COGS in the upper part and inventory value on the lower part, Fifo result in inventory in the upper part and cogs on the lower part...
Shelton FIFO => higher NI = higher Taxes =?> lower CFO?
dealsoutlook working capital = assets - liabilities. FIFO results in higer ending inv therefore higher working capital
achu LIFO: lower taxes -> higher cash flow.
lavalyn Cash flow pretax is the same FIFO or LIFO, but LIFO reports lower income. So lower income tax cash outflow.
viannie Higher cashflow (CFO) for LIFO:

Basically, pay higher tax for FIFO with respect to LIFO.

Curriculum p310 example gives very clear aspect of this.

Look at just cashflow from operations then it becomes clear
(in a environment where input costs are rising):

Lower priced inventory is sold first.
As a result, remaining inventory is higher b/c it includes the later purchased but higher priced units.

COGS would be lower => net income would increase =>taxes paid will increase=> cash flow is reduced by the increase in taxes paid
Hishy Working capital is inversely related to CFO, since an increase in WC reduces CFO
CJPerugini If prices are rising then cash outflow increases. + Cash Outflow = - Cash Flow = Decreased Cash Flow
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