let’s just say we are talking about FIFO for a period of rising prices. This would results in Lower COGS and Higher Inventory --> Higher CA. Therefore higher current ratio. How does this affect debt ratios and what other balance sheet figures does the method of inventory affect and how?
Anyone?
I do not understand why you have to become so memory intensive. Many of these basic relationships can be worked out on the fly. Know and understand the relationship amongst the variables / items and then know what increases / decreases. That might be much more effective.
FIFO and LIFO do not affect debt, so any effect on debt ratios would be as a result of the effect on assets (and equity). With FIFO in rising prices, you have all your expensive, recently purchased goods in inventory. Assets are higher, so debt-to-assets would be lower. Also with FIFO in a period of rising prices, your COGS are smaller than they should be so net income is higher. That means equity will be higher (balancing the higher assets). Accordingly, debt-to-equity would also be lower. I agree with CPK that working it through from first principles makes sense.