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Basic Question 12 of 16

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
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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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Edward Liu

Edward Liu

Learning Outcome Statements

calculate and explain how inflation and deflation of inventory costs affect the financial statements and ratios of companies that use different inventory valuation methods

CFA® 2025 Level I Curriculum, Volume 2, Module 6.