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/RATIOFIFOLIFO
Net Income and Profit MarginsUsually higher in a rising price environment.Usually lower in a rising price environment.
Pre-tax Cash FlowSame.Same.
After-tax Cash FlowUsually 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 LiabilitiesUsually 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. InventoryUsually 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’ EquityUsually 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 EquityUsually higher in a rising price environment because net income is higher.Usually lower in a rising price environment because net income is lower.

Create Your Free Account

Create a free account to access this content and join our community of learners.

You'll get access to:

  • Access the full tutorial
  • Join our learning community
  • Track your progress
  • Bookmark content for later