If prices are increasing and you use LIFO, that means you're CF's start small and get bigger, but what implications does that have for FCF and for the value you would get from a DCF?
Initially you would have small CFs, your say yr 5 CF would be bigger, but how do you account for any offset by NWC?
Basically, what are the implications for a DCF's value using LIFO or FIFO?
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LIFO vs. FIFO only impacts CF from a tax context. In other words, EBITDA +/- Change in WC will be the same for LIFO and FIFO. You'll realize a difference in Net Cash Flows because your taxable income will vary depending on the LIFO or FIFO method. If you calculate Pre-Tax income for LIFO and Pre-Tax income for FIFO, the difference will also be the difference in NWC.
Right, but because you do realize a difference in Net Cash Flows, the DCF value would be different using each method right?
Yeah. Take the difference of the two tax rates, DCF it and thats the incremental up/down impact of the LIFO/FIFO method.
Anyone know if I'm missing any additional tax implications?
Aside from the tax implication.
During an inflation period, switching from FIFO to LIFO will lower the change in NWC and by consequence will increase your FCF.
Walk me through an example where you get difference CFs (before taxes) from a LIFO vs. FIFO.
LIFO and cash-basis effects (Originally Posted: 02/02/2010)
I am doing some research on inventory costing methods, specifically LIFO and need to know what implications it has, if any, to cash-basis accounting. Please be gentle in your responses as I am new to the accounting world.
try investopedia.com
they have pretty good answers regarding basic financial and accounting concepts
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