# FIFO/LIFO differential over time

When comparing a company using LIFO to a company using FIFO, which of the following choices best reflects the financial statement (ratio) impact in a rising price environment? a. The LIFO current ratio will be lower, and the difference will increase in size over time. b. The LIFO current ratio will be lower, and the difference will decrease in size over time. c. The LIFO current ratio will be higher, and the difference will increase in size over time d. The LIFO current ratio will be higher, and the difference will decrease in size over time. Dreary

Well for sure the LIFO current ratio will be lower…not sure about the size increase/decrease I think as long as there is no LIFO liquidation, the size should increase over time? I’ll go with A

Px increase LIFO => higher COGS => lower inventories => lower assets => current ratio so either A or B Purely a guess, I would say B because as price increases, each increase is a smaller proportion…? i.e. an increase from 29 to 30 is a greater percentage increase than an increase from 39 to 40. random i know!

A. Assuming no liquidation the difference will increase since LIFO will have outdated inventory prices, while the FIFO inventory will be at continually increasing prices.

is ‘B’ the answer? For LIFO in rising prices, COGS is high, Investories are low, therefore CA is low. Now as the time increases… … At the FIFO side, all the old investories would had been sold and relatively newer inventories were supposibly added to the warehouse, cauing the difference between CA(LIFO) and CA(FIFO) to diminish over time… - Dinesh S

Got to be A right? current assets are staying relatively constant over time under LIFO (old inventory)…When using FIFO (higher/newer inventory), current assets are increasing over time… Therefore, in rising prices, the difference in CA between the two should be increasing…A

A

Right explanation is given by chadtap! Think of ending inventory (EI). It is current assets. It is directly related to the current ratio. Under LIFO, EI is low (i.e., current ratio is low). Over time, EI remains low, because units sold are taken from recent purchases, but FIFO EI gets larger because old inventory gets cleared quickly. One EI is constant while the other one is increasing. Dreary