Hey guys, Can anyone please explain why the QUICK/CASH Ratios would be higher under LIFO as apposed to FIFO? The reason stated in Investopedia is “less tax” but i can’t see how tax comes into to play?
LIFO has higher cost of goods sold since it uses cost of most recent inventory (assuming rising costs). This reduces reported pre tax income, and thus reduces the tax expense. Lower tax expense increases cash flows.
Quick ratio = Current Assets-(Inventory)/Current Liabilities ? If inventory is taken out of the equation surely the ration under lifo would be equal to fifo?
Isura’s post is correct. Focus more on the actual cash flow to the firm. If COGS is higher under LIFO, and pretax income is lower, the firm actually pays less cash out for taxes. This allows them to have more cash on the balance sheet, which is a current asset.