What is the effect on financial ratios when using LIFO instead of FIFO?
During periods of significantly increasing costs, LIFO when compared to FIFO will cause lower inventory costs on the balance sheet and a higher cost of goods sold on the income statement.
This will mean that the profitability ratios will be smaller under LIFO than FIFO. The profitability ratios include profit margin, return on assets, and return on stockholders’ equity.
The inventory turnover ratio will be higher when LIFO is used during periods of increasing costs. The reason is that the cost of goods sold will be higher and the inventory costs will be lower under LIFO than under FIFO.
Learn more about Financial Ratios and Inventory and Cost of Goods Sold.
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