assuming rising prices and stable or increasing inventory levels is ROE lower under fifo? i think yes but can someone confirm?
well my opinion is ROE will be HIGHER because of a higher net income under fifo and of course based on your assumptions.
i agree with kguizo, but check the dupont formula just to make sure.
so then the higher shareholder equity due to fifo is not included in the denominator? i first thout it wasnt and had the same conclusions as you guys. then today i changed my mind… i am all confused… i think you guys are correct… roe will be higher…due to higher net income… equity is not affected at all…
now another question… debt to equity ratio: is lower using fifo assuming rising prices and stable inventory… b/c under fifo assets are higher as well as r/e… roe ration: net income / equity under fifo net income is higher and so is equity so due to the denominator effect this ratio should also be lower? i am confused as hell right now about roe…
if equity is unchanged in the roe ratio then how come when calculating the debt to equity ratio it changes? debt to equity ratio is lower under fifo b/c equity is higher… how come equity is not hight using the roe equation?
I retract my last statement. Under FIFO, Equity and net income are both higher. Therefore you cannot say for sure ROE increases or decreases. That is my understanding at least. -L
now we are talking… this is an understandable expliantion… thanks… anyone else agree on this so we can put it to bed… i agree now
Assuming the firm has been operating profitably for more than one year, equity (accumulated retained earnings) is larger than net income (i.e. ROE < 100%). Not necessarily true, but usually that’s the case. The same $1 added to NI and to equity will a larger (percentage) impact on the smaller number (NI), so in general any change that increases NI and equity by the same absolute amount will increase ROE.
Consider two numbers ROE = 20% = 20/100 Now Both NI and Equity increase by 5 ROE = 25/105 = 23.8%
Just to add, on the tax side, for LIFO since COGS are based on higher prices at the end of the period, your expenses are slightly higher, thus lower taxable income, and lower taxes compared to FIFO.
wessun Wrote: ------------------------------------------------------- > Just to add, on the tax side, for LIFO since COGS > are based on higher prices at the end of the > period, your expenses are slightly higher, thus > lower taxable income, and lower taxes compared to > FIFO. …which means more cash flows under LIFO assuming rising prices.