The year end balances in a company’s lifo reserve were 50 million for both 2006 and 2007. For 2007, the measure that will most likely be the same regardless of whether the company used the LIFO or FIFO inventory method is the: A. current ratio B. inventory turnover C. gross profit margin D. amount of working capital
Choice B
why choice B? I can talk myself in and out of practically A,B,C and D. I guess the question is: if there is no change in the eding lifo reserve, what will change less: COGS or INVENTORY?
COGS_FIFO = COGS_LIFO - change in LIFO Reserve so, COGS_FIFO = COGS_LIFO If COGS are the same, the Inventory Turnover = COGS/Avg Inventory The question is whether: 1) Inventory at begining of period is same whether you use LIFO or FIFO, and 2) Inventory at end of period is same whether you use LIFO or FIFO? That gets hard to manage! However, Net Profit is the same for sure because: NI_FIFO = NI_LIFO + change in LIFO_Reserve = NI_LIFO Gross profit? Should be same as NI, so answer is C.
My guess is NO CHANGE IN GPM because if there is no change in ending lifo reserve, that means there is no change in COGS. If cogs is same, then GPM will be the same because GPM = (sales - cogs)
do you have official answer? my guess is C. inventory trunover and change in working capital must change when using different inventory methods. and is working capital changing then Current ratio will change too?
my choice is B