Impacts 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. |
