Minimum Variance Hedge RatioOne problem with using futures contracts to hedge a portfolio of spot assets, is that a perfect futu...
Lessons
- Inventory - Introduction
- Costs Included in Inventory
- Inventory Valuation Methods
- Inventory Accounting Analysis and Inflation/Deflation
- Perpetual Vs. Periodic Inventory Systems
- Impact of Inventory Valuation Methods
- Inventory at Net Realizable Value
- Disclosures Relating to Inventories
- Impacts of LIFO and FIFO Inventory Methods on Selected Financial Ratios
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. |
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