The most comprehensive educational resources for finance

Impacts of LIFO and FIFO Inventory Methods on Selected Financial Ratios

The following table summarizes the impact of LIFO and FIFO inventory methods on selected financial ratios.

FINANCIAL STATEMENT/RATIO FIFO LIFO
Net Income and Profit Margins Usually higher in a rising price environment. Usually lower in a rising price environment.
Pre-tax Cash Flow Same. Same.
After-tax Cash Flow Usually lower in a rising price environment because a company is reporting higher net income due to lower COGS. Usually higher in a rising price environment because a company is reporting lower net income due to higher COGS.
Current Ratio = Current Assets/Current Liabilities Usually higher in a rising price environment because reported inventories are more valuable and COGS is lower. Usually lower in a rising price environment because reported inventories are based on lower cost purchases and higher COGS.
Inventory Turnover = COGS/Avg. Inventory Usually lower in a rising price environment because the average cost of inventory will be higher. Usually higher in a rising price environment because the average cost of inventory will be lower.
Debt-to-Equity Ratio = Total Interest Bearing Debt/Total Shareholders’ Equity Usually lower in a rising price environment. Usually higher in a rising price environment.
Return on Assets
=Net Income/ Avg. Total Assets
Return on Equity
= Net Income / Avg. Total Equity
Usually higher in a rising price environment because net income is higher. Usually lower in a rising price environment because net income is lower.
Posted in Uncategorized

Leave a Reply

Your email address will not be published. Required fields are marked *

Name *