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.

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.