In an example in the CFAI book, the LIFO method results in lower ROA but higher ROE compared to FIFO?
I understand the calculation but not the concept. Any takers?
Under LIFO (with rising prices), net income will be lower, assets will be lower, and equity will be lower than under FIFO. If ROA is lower, then the percentage decline in net income is greater than the percentage decline in assets; that makes sense, as COGS is a big percentage of net income, but inventory is a smaller percentage of total assets. If ROE is higher, then the percentage decline in net income is less than the percentage decline in equity; this is possible if the difference between LIFO and FIFO COGS this year were smaller than it’s been in previous years.
Without the example handy, that’s the best I can figure.