4Q- 85 Strongsville Fabricators Inc. uses the FIFO method of inventory valuation. Assuming a rising costs environment and other factors held constant, Strongsville’s price-to-earnings and price-to-book multiples relative to those for another company that uses the LIFO method of inventory valuation would be: Price-to-earnings multiple Price-to-book multiple A. overstated overstated B. overstated understated C. understated overstated D. understated understated --------------------------------------- my guess:D FIFO leads to hi NI, lower PE.hi retained earning,hi BV, lower P/BV
It is D correct
D Fifo company would have higher earning (P/E would be understated) and higher assets bc more book value of inventory would have a higher book value so P/BV would also be understated.
Ok, with rising prices and other thing being stable: -The FIFO COGS will will be understated because we are first selling the old dated inventory. -The FIFO End Inventory is overstated as we will hold a stock containing the most recent goods. Looking at the ratios: - P/E: As FIFO COGS will be understated, EBITDA will be higher and consequently also net income will be higher. As a result P/E understated - P/BV: As FIFO COGS will be understated, EBITDA will be higher and consequently also net income will be higher. Therefore, BV will be higher. P/BV understated Correct question is D.